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Integrating weather and spark spread options for valuing a natural gas-fired power plant with multiple turbines

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  • M. Reaz-us Salam Elias
  • M. I. M. Wahab
  • Liping Fang

Abstract

A model that integrates spark spread and weather options in valuing a power plant with multiple turbines is presented. The spark spread option entails the right to operate the plant when it is profitable to run. Weather also affects a plant’s operation. A mild winter inducing a lower heating requirement could decrease the payoff. An owner holding a long position in a temperature-based put option could exercise the option when accumulated heating degree days drop below a strike level of heating degree days. Results demonstrate that integrating spark spread with weather options adds value during a mild winter.

Suggested Citation

  • M. Reaz-us Salam Elias & M. I. M. Wahab & Liping Fang, 2017. "Integrating weather and spark spread options for valuing a natural gas-fired power plant with multiple turbines," The Engineering Economist, Taylor & Francis Journals, vol. 62(4), pages 293-321, October.
    • Handle: RePEc:taf:uteexx:v:62:y:2017:i:4:p:293-321
    DOI: 10.1080/0013791X.2016.1258746
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    Cited by:

    1. Simshauser, Paul, 2020. "Merchant renewables and the valuation of peaking plant in energy-only markets," Energy Economics, Elsevier, vol. 91(C).
    2. Nadarajah, Selvaprabu & Secomandi, Nicola, 2023. "A review of the operations literature on real options in energy," European Journal of Operational Research, Elsevier, vol. 309(2), pages 469-487.

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