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The spark spread and clean spark spread option based valuation of a power plant with multiple turbines

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  • Elias, R.S.
  • Wahab, M.I.M.
  • Fang, L.

Abstract

This paper offers a novel study of two key factors that affect the valuation of a natural gas-fired power plant having multiple turbines: carbon allowance prices and the ability to switch among turbines. Amid stricter environmental rules on CO2 emissions, a power plant operator needs to be able to judge how the purchase of carbon allowances affects the plant's expected value; and whether the plant's value rises from switching among turbines. This paper presents a model analysis of a spark spread and clean spark spread option-based valuation of a power plant with multiple gas turbines — using a bivariate and a tri-variate lattice, respectively. Results demonstrate that the purchase of CO2 allowances lowers the plant's expected value. Conversely, when operations of turbines are switched in response to price movements, the plant's value increases. This outcome has implications for plant management decisions: when to switch among turbines and how the purchase of CO2 allowances affects the plant's value.

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  • Elias, R.S. & Wahab, M.I.M. & Fang, L., 2016. "The spark spread and clean spark spread option based valuation of a power plant with multiple turbines," Energy Economics, Elsevier, vol. 59(C), pages 314-327.
    • Handle: RePEc:eee:eneeco:v:59:y:2016:i:c:p:314-327
    DOI: 10.1016/j.eneco.2016.08.003
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    Cited by:

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    3. Luis M. Abadie, 2021. "Energy Market Prices in Times of COVID-19: The Case of Electricity and Natural Gas in Spain," Energies, MDPI, vol. 14(6), pages 1-17, March.

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    More about this item

    Keywords

    Power plant valuation; Spark spread option; Clean spark spread option; Lattice approach;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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