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An accurate valuation of generation assets and their associated risks is crucial.It provides an accurate view of a portfolio's current value and enhances the ability of the owner to quantify and hedge the risk associated with the asset. Given the ability to run (or not run), it has become common place to view generation units as "real options" when attempting to value them; however, this can run into strong headwinds attempting to evaluate all the associated physical constraints
The first of a two-part post looking at the background to the short-term valuation of generation assets. It also considers how options can be used to achieve this and why classic financial options theory overestimates value.