Real option valuations are used by existing or prospective owners of power plants to support acquisition, divestiture, development, or retirement decisions. Owners of power plants also use real option valuations to support capital decisions, such as the installation of environmental controls, the expansion of plant capacity, or equipment to improve efficiency.
L.E. Peabody & Associates, Inc., an economic consulting firm, specializes in supporting economic decisions around electric power generating facilities or “power plants.” The company uses Palisade’s @RISK software to measure a power plant’s real option value and define a power plant’s risk profile. Monte Carlo simulation is applied to simulate a power plant’s economic dispatch into uncertain power and fuel prices, thus helping the firm show current and prospective plant owners the full range of possibilities around strategic decisions.
“@RISK allows our firm to easily and comprehensively develop real options analysis for our projects that involve market uncertainty,” says Brian Despard, Vice President with L. E. Peabody & Associates. “As an Excel add-in, it integrates seamlessly into our various spreadsheet models. @RISK’s selection of distributions and functionality provide us with more than enough flexibility to develop our quantitative analyses.”