Option Valuation of Peaking Capacity

Analysis Group was asked by a private investor to value a fleet of peaking generation units operating in the Midwestern U.S. We used our own Monte Carlo-based model to simulate the operation of these units over a 15-year period, based on the historical price dynamics in the region and on forward price data provided by the client. The model relied upon a stochastic characterization of electricity and gas prices and their correlation to calculate operating profits contingent on the plant's being economical and operating for a given draw from the price process.