Hedging Strategy and Electricity Contract Engineering - IFOR

Chapter 4
Contract engineering
4.1. Overview
Some power plants allow the owner to quickly change the output at low costs.
Other plants however, does not facilitate this flexibility. As is the case with
contracts, some give the owner flexibility, like an option. Other contracts lock
in the owner and forces him to fulfill certain obligations, such as a future.
This analogy can actually help us to view any production plant as a series of
financial instruments [Tha00]. Contract engineering is a structured way to
engineer contracts that can be hedged and assessed in terms of production.
Different plant types and their corresponding contracts are investigated in
Chapter 4.2-4.6. Production outages and their related contracts are discussed
in Chapter 4.7. Transmission assets are treated similarly in Chapter 4.8. The
closely related theory on real options is introduced in Chapter 4.9. The value
of different plant types is discussed in Chapter 4.10. The engineering of new
contracts that through own production are risk manageable is introduced in
Chapter 4.11.
4.2. Gas turbine
Unlike most other thermal plants, the gas turbine does not use steam to propel
a turbine. Instead, the combustion of natural gas produces expanding gases,