Integrating weather and spark spread options for valuing a natural gas-fired power plant with multiple turbines

A model that integrates spark spread and weather options in valuing a power plant with multiple turbines is presented. The spark spread option entails the right to operate the plant when it is profitable to run. Weather also affects a plant’s operation. A mild winter inducing a lower heating requirement could decrease the payoff. An owner holding a long position in a temperature-based put option could exercise the option when accumulated heating degree days drop below a strike level of heating degree days. Results demonstrate that integrating spark spread with weather options adds value during a mild winter.