Coal gasification in a deintegrated electricity industry

Abstract

This paper examines coal gasification in the context of a regulated utility purchasing power from an independent power producer (IPP). It outlines various contractual approaches that might be used to achieve coordination between the profit motive of the IPP and the desirability of limiting the potential escalation of natural gas prices through a backstop technology. These approaches are formulated as options. A numerical method to value the gasification option is presented. The option value is found to be significant (although uncertain). The transactions costs associated with writing contracts to incorporate the option value are substantial. Vertical integration may handle these issues more easily.