The spark spread and clean spark spread option based valuation of a power plant with multiple turbines

- Valuation of a power plant with multiple turbines under CO2 restriction is investigated.
- Electricity, gas, and CO2 prices are modeled by using mean-reverting processes.
- Turbines have different emission rates, heat rates, and generation capacities.
- How operational flexibility with and without CO2 price affects the value is analyzed.
- Sensitivity to process parameters of electricity, gas, and CO2 prices is presented.

This paper offers a novel study of two key factors that affect the valuation of a natural gas-fired power plant having multiple turbines: carbon allowance prices and the ability to switch among turbines. Amid stricter environmental rules on CO2 emissions, a power plant operator needs to be able to judge how the purchase of carbon allowances affects the plant's expected value; and whether the plant's value rises from switching among turbines. This paper presents a model analysis of a spark spread and clean spark spread option-based valuation of a power plant with multiple gas turbines - using a bivariate and a tri-variate lattice, respectively. Results demonstrate that the purchase of CO2 allowances lowers the plant's expected value. Conversely, when operations of turbines are switched in response to price movements, the plant's value increases. This outcome has implications for plant management decisions: when to switch among turbines and how the purchase of CO2 allowances affects the plant's value.