Flexibility valuation in the Brazilian power system: A real options approach

This paper presents a valuation study of operational flexibility in the complex Brazilian Power System. Thermopower plants represent operational flexibility for the national system operator provided they can be dispatched in dry periods to supply part of the load when reservoir waters are too low. Deficit costs can be avoided as a result.

We have adopted a real options approach to calculate the fair value of a financial subsidy to be paid to thermal generators for their availability to the system. A financial subsidy is mandatory for their economic feasibility and, therefore, for increased thermopower capacity in the Brazilian Power System. This is why this policy is currently being studied by Brazil's federal government.

In order to illustrate our modeling we have run the model for the southeast subsystem. We found a flexibility value of US$4.52 billion, which represents US$497/MW per year. This means that a 100 MW thermopower plant should receive US$49,700 for each year of its economic lifetime as a fair premium incentive to investments.