Technology Choice in Gas Fired Power Plant Investments

The profitability of gas fired power plant investments depends on the spark spread, defined as the difference between the price of electricity and the cost of gas. Using a mean reverting two-factor model of the spark spread we analyse investment in two types of gas fired power plants in Norway. The first type is base load, i.e. a plant in which electricity is generated at all levels of spark spread. The second is also base load at the outset, but can be upgraded at a cost, to a peak load plant that only produces when the spark spread exceeds the emission costs. The mutually exclusive alternatives are analyzed with respect to optimal investment level and upgrade level for the spark spread. One of the results is that it is suboptimal to select the alternative having the lowest investment trigger level for the spark spread.