Beyond the spark spread option – fuel switching

anaging power generation assets is a complex and challenging task. From the perspective of a regulated utility, the objective is to satisfy its customers and minimise costs. The focus of other energy service companies operating in a deregulated market is on profit maximisation. Large power companies may hold many assets that include a variety of fossil-fuelled power plants such as coal, gas or oil-fired facilities. Maximising the spread between the market price of power and generation costs can be achieved by various means, including producing power when power prices are favourable or reducing costs, or both. One of the primary costs in generating power is the cost of fuel. Capturing the maximum spread between the market price of power and the underlying fuel costs can be achieved by dispatch schedules that are optimised to the market. Additional flexibility can be achieved with the capability to switch from one fuel to another in response to market movements in the underlying fuel prices. This can be carried out in various ways: multiple plants, each using different fuels; individual plants with multiple generation units using a mix of fuel types; or a single generation unit that has the capability of switching fuels, a so-called co-firing plant. For example, the proliferation of new gas-fired plants has put a burden on the natural gas market, causing large swings in volatility to meet demands for power generation. Asset managers can hedge against this by taking advantage of fuel switching within their inventory of generation assets. An asset risk manager, who has the task of estimating the potential value of multiple assets using different fuels or a single co-firing generator, needs a fast approximate tool to model and estimate the value of these assets. The tool would also be useful in estimating the economic feasibility of building new fuel-switching capable power plants by weighing the additional multi-fuel technology construction costs against the additional potential profit of this class of facility.