Structural Estimation of Switching Costs for Peaking Power Plants

Abstract

We estimates costs associated with mothballing, restarting, abandoning and maintaining peaking power plants. We develop a real options model to explain switching and maintenance behavior of plant managers. The constrained optimization approach to estimate crucial costs accommodates non-parametric dynamics for the expectations of the plant managers regarding future profitability. The empirical analysis is based on the status of power plants reported annually to the United States Energy Information Administration (EIA) during 2001-2009. We arrive at economically meaningful estimates of maintenance costs and switching costs, and discuss these in light of rates used in the Pennsylvania-New Jersey-Maryland capacity market.

Structural Estimation of Switching Costs for Peaking Power Plants