Valuation of power plants by utility indifference and numerical computation

Arnaud Porchet, Nizar Touzi, Xavier Warin

Research output: Contribution to journalArticlepeer-review


This paper presents a real option valuation model of a power plant, which accounts for physical constraints and market incompleteness. Switching costs, minimum on-off times, ramp rates, or non-constant heat rates are important characteristics that can lead, if neglected, to overestimated values. The existence of non-hedgeable uncertainties is also a feature of energy markets that can impact assets value. We use the utility indifference approach to define the value of the physical asset. We derive the associated mixed optimal switching-control problem and provide a characterization of its solution by means of a coupled system of reflected Backward Stochastic Differential Equations (BSDE). We relate this system to a system of variational inequalities, and we provide a numerical comparative study by implementing BSDE simulation algorithms, and PDE finite differences schemes.

Original languageEnglish (US)
Pages (from-to)47-75
Number of pages29
JournalMathematical Methods of Operations Research
Issue number1
StatePublished - Aug 2009


  • Backward stochastic differential equation
  • Finite differences for PDE
  • Non-linear Monte Carlo methods
  • Real option
  • Utility indifference

ASJC Scopus subject areas

  • Software
  • General Mathematics
  • Management Science and Operations Research


Dive into the research topics of 'Valuation of power plants by utility indifference and numerical computation'. Together they form a unique fingerprint.

Cite this