Hedging Strategy and Electricity Contract Engineering - IFOR

80 Contract engineering
however is that the quantity to buy in the futures market is unknown. It will
depend on how often the electricity price exceeds the, by the gas price implied,
marginal cost, and since the electricity price is stochastic also the demanded
gas volume will be stochastic.
A stochastic strike price is not a desired property when identifying a plant’s
corresponding contracts, rather one wants to allocate all the stochastics in the
underlying process. This can actually be done, since a gas turbine essentially
is a process where natural gas is ’refined’ to electricity, i. e. gas is changed for
electricity. Hence, in each period we have the option to change gas at a value
of p max S g H for electricity at the value of p max S e at zero costs. Each such
option is called a spark-spread 6 option, why a gas turbine equals a series of
such spark-spread options. With the same reasoning as above this can also be
seen as a cap on the spark spread, defined by S e H S g , where the capped
level equals zero.
A plant with increasing popularity is the combined cycle gas turbine (CCGT),
which uses the high temperature of the gas turbine exhaust to boil water. The
steam is then used to propel a steam turbine. The efficiency is increased compared
to a pure gas turbine, but the flexibility suffers from the same disadvantages
as the coal plant and the oil plant that are discussed in Chapter 4.4. Like
the gas turbine, the CCGT is associated with relatively short construction times,
which is an important advantage over other plant types. The CCGT plant is in
general larger than the gas turbine and typically has a capacity of 50-500 MW.
4.3. Hydro storage plant
A hydro storage plant uses the potential energy of water stored in a reservoir,
typically located on high altitudes in the mountains. By utilizing the difference
in altitude between the reservoir and the turbines, this potential energy is
converted into mechanical energy by letting the water, under high velocity,
propel the turbines. In the generators this mechanical energy is converted
into electrical energy. Some of the hydro storage plants also have pumps,
6 Spark spread denotes the difference of the price of electricity and the price of the gas
needed to produce it.