Choice of Nuclear Power Investments under Price Uncertainty: Valuing Modularity

This work aims at examining how to compare two investment projects in the electricity market. The first project is a flexible sequence of small nuclear power plants, whereas the second is a nuclear power plant of large capacity. We measure the option value generated by the modularity of the first project, given the uncertain future competitive price of electricity. Using a realistic calibration of the model, we show that the option value of modularity has a sizeable effect on the optimal dynamic strategy of the producer, in particular in terms of the optimal timing of the decision to invest in the first module.