Economic and Technical Background

Abstract

This chapter provides some background on technical details and economic variables that are necessary for assessing investments in energy assets. We introduce some concepts that can be employed for measuring the profitability of power stations. Regarding coal- and natural gas-fired stations operating under carbon constraints, we present the clean dark spread and the clean spark spread. The approach can be similarly extended to the case of power stations with a gasification plant, and also to those that generate electricity from renewable resources. Numerical values for the parameters involved are taken from official statistics and commodity markets. Note that futures contracts on energy commodities can have maturities up to six years into the future. We draw on these data sources, but sometimes the values are rounded since we ultimately aim to develop realistic examples (not real cases). We focus mainly on average values, yet we could also derive the risk profile of a number of energy projects through simulation.