Valuing fuel diversity in power markets

The Situation

A coal-fired generator located in Northern Ireland asked Northern Ireland Electricity (NIE) for a contract extension based on its contribution to fuel diversity.

NERA's Role

Working in concert with NIE and its regulator, NERA examined the potential value of fuel diversity by studying the correlation between coal, oil and gas prices in northwestern Europe. NERA then valued the generator's offer by computing the cost of an alternative portfolio with equivalent risk characteristics, namely, a gas-fired power station and a suite of options on long-term oil contracts.

The Result

NIE used this estimate as the basis for negotiations with the generator.