This paper examines the investment in and the valuation of power generation projects under uncertainty. The analysis incorporates the possibility of producing from alternative types of fuels, such as renewables (wind) or fossil fuels (gas), hence alternative types of plants/technologies. The model considered in this paper cannot be reduced to a single state variable. It involves two distinct underlying processes, for electricity and gas, as well as embedded (two-dimensional) optimal stopping time problems.  We apply probabilistic arguments and show that the optimal investment decision can be characterized by two boundaries that satisfy a system of coupled integral equations of Fredholm type.  The value of a project to invest in the best of the two types of plants is the premium associated with the optimal investment policy, i.e., the present value of the cumulative instantaneous gains realized when either of the two technologies is optimal. The ability to select the type of plant/technology has significant effects on investment in power generation. The optimal delay can be substantial even if the values of both projects are both large.  Green power generation emerges as a significant source of value creation. (Joint work with Jerome Detemple).

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Dr. Yerkin Kitapbayev  received his BS and MS from Lomonosov Moscow State University and a PhD in Mathematical Finance from the University of Manchester in 2014.  He spent two years as a visiting assistant professor in the the Questrom School of Business at Boston University.  He is now a senior lecture in Finance at MIT Sloan. He works in Probability and Stochastic Processes.