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

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

Energy Economics, 2016, vol. 59, issue C, 314-327

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.

Keywords: Power plant valuation; Spark spread option; Clean spark spread option; Lattice approach (search for similar items in EconPapers)
JEL-codes: C60 D81 G31 G32 L94 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:59:y:2016:i:c:p:314-327

DOI: 10.1016/j.eneco.2016.08.003

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