Hedging Strategy and Electricity Contract Engineering - IFOR

86 Contract engineering
4.4. Coal plant and oil plant
The coal plant and the oil plant are two thermal plant types, where the fuel,
coal or oil is burned to boil water. The steam from the boiled water is then
used to propel a turbine, driving a generator to produce electricity. Coal plants
are typically large scale units with a capacity between 250 and 1000 MW and
coal plays a major role as a source of energy and provides some 39% of the
world’s electricity. Oil plants are in general smaller and some 11% of the
world’s electricity is produced with oil [HL00].
The coal plant and the oil plant are flexible to some extent. The output can be
varied 11 with a stable operation within the range of 25-100% of the maximum
capacity [CIAB96]. Thermal losses however occur in the boiler when the plant
is shut down or when output is decreased. Further, there are costs and lead
times associated wit start-up, since a large amount of water has to be heated to
a boiling point to get steam to propel the turbines.
The marginal cost is, as in the gas turbine case, mainly attributed to fuel costs.
Since coal and oil is cheaper than gas, the variable costs are lower than these
for a gas turbine, but higher than, for example, these for a nuclear plant. The
coal plant and the oil plant are because of their intermediate marginal costs
not typical base load or peak load units, but rather something in between, why
they are normally referred to as intermediate load facilities.
The price of the fuel used, coal or crude oil, is as the gas price stochastic. The
volatility is however lower. One may be tempted to take the same approach
as for the gas turbine, arguing that the plant in each period corresponds to an
option to exchange the fuel used, coal or oil, for electricity at a given price,
determined by the efficiency of the plant. The lower flexibility of the coal plant
and the oil plant, caused by the slower response time by start-up and the thermal
losses by shut-down, however complicates the picture.
11 Changes of load (ramping) are typically 3-5% per minute, but can be up to 8%
[CIAB96].