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Public Utilities Reports

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Fortnightly Magazine - March 15 1998

Spark Spread Options: Linking Spot and Futures Markets for Gas and Electricity

Michael C. W. Hsu and Nguyen T. Quan

THE RAPID DEREGULATION OF THE BULK POWER MARKET has exposed utilities and power generators to the harsh reality of spot price volatility. This new reality begs the question: How can merchant generators, independent power producers and investor-owned utilities analyze their risk exposure when energy prices vary daily or even hourly?

The answer lies with spark spread options (em the link between electric power and gas prices.

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