Black-Scholes Model, Flexibility, Hydropower, Real Option, Reservoir Operation


This research presents a valuation study of flexibility in hydropower generation. Flexibility herein is considered as a stochastic process and is defined as the difference between the maximum hydropower energy generation capacity and the scheduled energy production plan to meet the demand and obligatory sales of electricity. To value the flexibility, this framework combines options theory and the Non-dominated Sorting Genetic Algorithm II (NSGA-II), while this paper focuses only on real option model. Options theory is used in this research to create a framework that can value the flexibility at various levels of risk for a multi-reservoir system. A Black-Scholes-like equation, which is a Partial Differential Equation (PDE), is solved numerically using standard solvers. The value of flexibility is estimated based on the solution of the Black-Scholes-type model. The results could help in assessing the value of flexibility over time and hence, guide allocating hydropower generation capacity from one period to another.