Valuation of operational flexibility: A case study of Bonneville power administration

Real options theory is applied to quantify the value of operational flexibility intrinsic to the hydropower generation capacity from the perspective of US federal power marketing administrations. The option value in this model arises from the tension between the increase in current sales revenue and the increase in the exposure of future power shortages. Using Bonneville Power Administration as an example, we apply the proposed valuation framework, analyze the optimal management policy for Bonneville Power Administration and investigate the potential impacts of Wind Vision 2050. •Evaluate operational flexibility from hydro plants with reservoirs.•Investigate an application to federal power marketing administrations.•Explore a potential impact of Wind Vision 2050.•Extend real option analysis from discrete to continuous action problems.•Focus on uncertainties in quantities instead of prices.