On the pricing and hedging of combined cycle power plants using option pricing theory

There has been an increasing interest on pricing power plants. The main reasons are making power investment decisions, related to the risks derived from managing or investing in combined cycle power plants. A stochastic model for the electricity futures curve has been applied for studying, using the option pricing theory framework, the pricing and hedging of a combined cycle power plant. The solution is obtained by means of solving a stochastic control problem over any feasible future load strategy. We discuss the practical case of hedging against market futures the plant risks. Finally we test against market historical values, the validity of the hedging strategy.