Juan Inda, PhD student at CERE presented his and Chandra Kiran's ongoing work in addressing the issue of valuation of a flexible power plant with fixed production capacity using optimal switching.
A power plant faces uncertainties including those regarding market price, resource and production constraints such as limited storage capacity, switching costs and minimum on-off times. The controller of the plant monitors the different parameters and wants to optimize the profit by operating in an optimal way by starting and stopping the production based upon parameter fluctuations. The approach can be used to value a hydro-electric power plant that sells electricity at varying prices, with a finite water reservoir filled up by a river upstream and switching costs due to interruption and resumption of production.
Their research is concerned with finding an optimal starting/stopping (switching) policy and the corresponding value function. The intention of the coming paper is to formulate and provide a comprehensive solution to the general problem as a finite-time switching problem with a storage process and establish the existence and uniqueness of the solution in the general case.