Hedging Strategy and Electricity Contract Engineering - IFOR

78 Contract engineering
1800
1600
1400
1200
NOK/MWh
1000
800
600
400
200
0
1 7 13 19 1 7 13 19
Fig. 4.2: Hourly payoff of the gas turbine, corresponding to the spot prices
exceeding the marginal cost of 200NOK/MWh during the 24 and 25
of January 2000.
situation for a spot buyer, since the electricity costs would increase substantially
due to these spikes. Assume further that we had a 1 MW gas turbine with
a constant marginal cost of 200 NOK/MWh at our disposal. With the reasoning
above we would then choose to produce instead of buying electricity, as
soon as prices exceed 200 NOK/MWh. This month we would exercise 17 of our
24 31 744 hourly options, namely during the hours with prices higher than
200 NOK/MWh, which is illustrated in Figure 4.2 showing the hourly payoffs
of the gas turbine. Our actual cost for achieving electricity under that month
would equal the spot price for all hours with a spot price lower than 200 and
equal 200 for all hours with a spot price exceeding 200, i. e. min S eš 200› .
This corresponds to a so-called capped spot contract and in Figure 4.3 one
clearly sees the capping effect of the gas turbine. 5
The problem with this reasoning is that the gas price is not constant, but
rather very volatile. The volatile gas prices are exemplified in Figure 4.4. The
marginal cost hence is stochastic, why also the strike price will be stochastic.
The gas price can be fixed through, for example, gas futures. The problem
5 See Chapter 2.7 for a description of a capped contract.