Hedging Strategy and Electricity Contract Engineering - IFOR

4.5 Nuclear plant 91
of 1000 MW. Over 16% of the world’s electricity is generated from nuclear
plants [HL00].
The nuclear plant has very low marginal costs, which typically amounts
to a third of the marginal costs in a coal plant and between a fourth and a
fifth of those for a gas combined-cycle plant [OEC98]. 14 The flexibility is
unfortunately very low, caused by the high costs associated with varying the
output. There have actually been occasions in, for example, France when EdF
has been willing to sell nuclear produced electricity at negative prices due to
these high costs. Nuclear plants are because of the low marginal costs and low
flexibility used for base load. Not only are nuclear plants subject to the start-up
times and shut-down losses that coal and oil plants suffer from, they are also
subject to a much more complex heating procedure. Whereas a coal plant or
an oil plant fairly easy can change output by simply regulating the amount of
fuel and air, the fission reaction is more sensitive to quick ramp ups and ramp
downs.
The low operational flexibility, forcing the plant to run over long periods of
time, implies that the owner has to take a decision whether to produce or not
in the future where the spot prices are uncertain. However, a series of long
future contracts would perfectly replicate this stable amount of produced electricity,
which consequently are the nuclear plant’s corresponding contracts. But
even if the flexibility would be high and the output could be changed instantly,
the option value would be small. Assuming a high operational flexibility, the
owner would in each period have the possibility to decide whether to produce
or not and the plant would hence equal a series of hourly options. Since the
marginal cost and hence the corresponding option’s strike price is so low, the
decision would however essentially solely be to produce. The options would
normally be deep in-the-money, 15 since the spot price by far would exceed the
low marginal cost. A possibility to not produce would consequently have a low
value. Generally, the more an option is in-the-money, the more the asymmetric
payoff is lost and therefore more of the option features are lost, 16 which is il-
14 Marginal cost is here defined as the total fuel cost, including waste management.
15 A call option is out-of-the-money if the underlying price S is lower than strike price K
and vice versa for a put option. An option is at-the-money if ­ S K . A call option is
in-the-money if ® S K and vice versa for a put option.
16 One important option feature is the possibility to achieve high returns with only mod-