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Suppose you are the CFO of a small Independent Power Producer in western PA (which is part of the PJM Electricity Grid (PA Jersey Maryland)). Your main business is to purchase natural gas and convert it to electricity for sale on the grid. You recently looked into PJM Western Hub futures contracts and natural gas futures that trade on the CMEGroup exchange.

Assumptions:

Natural Gas Input 60,000,000 MMBtu's / Six Months

Megawatt Hours Generated 9,000,000 MWh / Six Months

Price of Power Futures (N9) Sold $19.00 $/MWh

Price of NG Futures Purchased $2.00 $/MMBtu

a) What is the heat rate of your power plant in MMBtu/MWh?

b) If the spot price of NG is also $2.00, what is the minimum spot rate for electricity at which the plant should generate electricity?

c) What is the spark spread implied by the futures market contracts in $/MWh?

d) Ignoring the basis, how much profit can you "lock in" given current future prices (in $/MWh)?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92852469

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