Hedging Strategy and Electricity Contract Engineering - IFOR

4.2 Gas turbine 77
2000
1800
1600
1400
1200
NOK/MWh
1000
800
600
400
200
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31
Fig. 4.1: Hourly prices at Nord Pool in January 2000.
In each period the ˜ payoff would then be S e S g H multiplied with the capacity
of the plant, given that we produce, i. e. given that S e S g H and zero
if we do not produce
S S eš H› p ˜{ max S e S g H› œŸž
This payoff reminds us of a simple call option with the electricity spot as underlying
and the marginal cost as strike price. 3 If we for simplicity assume
gš
that the gas price is constant, then the marginal cost would also be constant 4
and a gas turbine would in contract terms equal a series of call options on the
electricity spot with the marginal cost as strike price.
Example 4.1 To exemplify, assume that we had to buy a constant flow of 1 MW
of electricity on the spot market at Nord Pool in January 2000. It turned out
that prices spiked in the end of that month and during the 24th and 25th of January
the spot price soared from its typical level of around 130 NOK/MWh up to
1800 NOK/MWh, as seen in Figure 4.1. This would not have been a pleasant
3 Compare with the payoff of a simple European call option in Chapter 2.7.
4 Efficiency of a plant normally decreases with time, but the time frame is then typically
years, why one for short horizons can assume that the heat rate is constant.