Hedging Strategy and Electricity Contract Engineering - IFOR

4.10 Value of different production plants 99
45
40
Investment
Operating
Fuel
35
30
$/MWh
25
20
15
10
5
0
Gas turbine Coal plant Nuclear plant
Fig. 4.8: Total generation costs divided into fixed (investment cost) and variable
costs (fuel and to some extent operating costs) according to
[OEC98].
marginal costs, like the nuclear plant or high flexibility like the gas turbine
or some features of the two, like the coal plant. To illustrate the relative
position of the different plants, we have ranked them according to flexibility
in Figure 4.9. Flexibility is here arbitrarily and subjectively defined as the
possibility to alter output in combination with its associated costs (e. g. start-up
and shut-down costs and times, and ramping). Another ranking, which is
closely related to the flexibility is presented in the same figure, namely the
excess value over the DCF derived value, stemming from the operational
flexibility. This value is highest for the plants on the top, corresponding to
bought options, is low or zero for the plants, corresponding to futures with low
or no option value and is negative for the plants, corresponding to sold options,
having a negative option value. 20 Finally the plants are ranked according to the
prevailing cost type, where the already mentioned inverse relationship between
fixed costs and marginal costs is illustrated.
20 Case studies by McKinsey & Co [LLMR¼ 00], show as expected, that the excess value
over the DCF value increases with flexibility.