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

Merchant renewables are a new asset class. With historically high cost structures and low wholesale prices associated with merit order effects, continuity of entry has been reliant on Renewable Portfolio Standards or other policy initiatives such as government-initiated Contracts-for-Differences. But in Australia's National Electricity Market, sharply falling costs of renewables and volatile wholesale market conditions from coal plant exits has led to a surprising number of merchant intermittent renewable investments. Adding to the merchant renewable fleet are older wind plants whose inaugural long-dated PPAs recently matured. Rolling over PPAs is possible, but not necessarily optimal. In this article, a merchant gas turbine, merchant wind, and an integrated portfolio comprising both plants are valued in the NEM's South Australian region. Asset valuations reveal surprising results. The modelling sequence shows stand-alone gas turbine valuation metrics suffer from modest levels of missing money, that merchant wind can commit to some level of forward (fixed volume) swap contracts in-spite of intermittent production, but the combined portfolio tightens overall valuation metrics significantly. Above all, the combined portfolio is financially tractable, overcoming the missing money for a gas turbine plant undertaking peaking duties. In a NEM region where intermittent renewable market share exceeds 50%, this suggests the energy-only, real-time gross pool design may yet be deemed suitable vis-à-vis meeting environmental objectives and Resource Adequacy. Cambridge Working Papers in Economics Faculty of Economics www.eprg.group.cam.ac.uk Merchant renewables and the valuation of peaking plant in energy-only markets

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Retrofitting carbon capture and storage to natural gas-fired power plants: A real-options approach

Elias

Wahab

Fang

2018

Journal of Cleaner Production

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

Cited by 6 publications

References 33 publications

A review of the operations literature on real options in energy

A review of the operations literature on real options in energy

Merchant renewables and the valuation of peaking plant in energy-only markets

Retrofitting carbon capture and storage to natural gas-fired power plants: A real-options approach

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