Model Risk and Power Plant Valuation

We consider the model risk inherent in the valuation procedure of fossil power plants. To capture model risk we use risk-capturing functionals, a methodology recently established in a series of papers. As gas-fired power plants are seen as flexible and low-carbon sources of electricity which are important building blocks in terms of the switch to a low-carbon energy generation, we consider the model risk in this asset class in detail. Our findings reveal that spike risk is by far the most important source of model risk