Power plants can bid on more than one product. That's why most spark-spread studies miss the mark.
Forward energy prices can make it look easy to place a value on a power plant. Yet...
While the forward price curve of electricity may have been appropriate for an environment dominated by regulatory price determination for a single product, it needs to be augmented in order to conduct strategic planning in the emerging competitive environment. The model based on single-commodity pricing necessarily ignores the possibility for generators' strategic, multiple product bids and the timing of units' dispatch opportunities, linked to startup costs and minimum run duration. In sum, the old approach leaves the income from ancillary services and supply imbalances out of the resultant valuation entirely. Hence, a structural model with the ability to capture price volatility and dynamic interaction for all products is needed to provide an internally consistent set of price curves, and base the earnings from respective sources on the dispatch. In this way, we now can provide a comprehensive assessment of generator value that properly incorporates multiple products and markets.
Dr. Rajat Deb is president of LCG Consulting, which conducted the first restructuring study commissioned by the California Energy Commission, using UPLAN, a multi-commodity, multi-area structural model with optimal power flow. Based in Los Altos, Calif., he can be contacted at firstname.lastname@example.org or 650-962-9670.
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