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

M. Reaz-us Salam Elias, M. I. M. Wahab and Liping Fang

The Engineering Economist, 2017, vol. 62, issue 4, 293-321

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.

Date: 2017
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DOI: 10.1080/0013791X.2016.1258746

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