Conference Agenda

Flexible resources are essential for power system reliability, especially with the increasing integration of variable renewable energy sources as the electricity industry moves towards decarbonization. This paper employs a real options approach to develop a model for valuing assets with power generation, storage and operational flexibility. Using a non-market valuation framework, we apply the no-arbitrage principle to calculate the marginal value of flexible operations through the shadow price, which reflects the fair value implied by electricity markets and provides a robust measure of the stringency of regulation on flexible operations. To assess the incentives for investing in flexible resources and offering flexible ramping products in power markets, we conduct extensive elasticity and sensitivity analyses. These analyses explore how the scarcity and cost of resources for power production and electricity price signals influence asset value and shadow price. In our numerical experiment, the optimal operation of a medium-sized prototype hydro power plant is formulated as an optimal control problem, where electricity prices follow a Markov regime-switching process with jumps. Under the risk-neutral measure, the asset value is determined by a system of Hamilton-Jacobi-Bellman Partial Differential Equations, which we solve numerically using the finite difference method with semi-Lagrangian time stepping. Our results indicate that while the plant value steadily decreases, the shadow price exponentially increases as ramping constraints become more restrictive. Both flexible ramping up and flexible ramping down are valued, but flexible ramping up holds significantly higher value for the power generator. The scarcity and cost of resources, along with electricity price characteristics, significantly impact asset value and shadow price, with varying magnitudes and directions of impact. The insights gained from this research can inform investment decisions in flexible resources, aid in the development of flexible ramping products markets, and guide the implementation of regulatory frameworks aimed at enhancing power system reliability while supporting environmental and climate goals.