Option games applied for investment in power generation capacity

Abstract

This kind of problem is usually described by a Game Theory (GT) approach. Furthermore, the investor must evaluate the investment alternatives taking into account the flexibility of the investment options, in order to face unfavorable market scenarios, including the strategic movements of its competitors. This kind of of problem is usually described by a Real Option (RO) approach. Therefore, it has been highlighted the necessity of developing a hybrid tool that combines the methods of GT and RO in order those inconveniences in the order to fully face in the power generation problem mentioned. This evaluation tool, called Options Games has been developed recently. Despite its enormous potential, this new methodology has not yet received significant attention in the field of power generation. This paper presents an application of the Options Games approach in order to describe the challenge of investment in power generation capacity in a duopoly market.