The Real Options to Shutdown, Startup, and Abandon: Structural Estimation of Switching Costs

Abstract

In this thesis we analyze the real options to shutdown, startup and abandon gas fired power plants. We assume that the plants’ status for a given year is either operating, in standby or retired. Their status is further dependent on a stochastic two-factor model for the spark spread process. The analysis is made possible by data on operating status as reported annually to the US Energy Information Administration. We estimate the irreversible costs of switching by structural estimation of a real options model. The proposed model also indicates the spark spread triggers and option values for the switching decisions.