Consider an electric utility that may use either coal or natural gas to generate electricity. Under which of the following conditions is co-firing equipment least valuable? Let a_c be the annual standard deviation of coal prices, and let a_n be the annual standard deviation of natural gas prices and p the correlation between coal prices and natural gas prices. A)a_c high, a_n high, p low B)a_c high, a_n low, p low C)a_c low, a_n high, p low D)a_c low, a_n low, p high

Question

Quizplus · Accepted Answer

Co-firing equipment is least valuable when both coal and natural gas prices have low volatility (low annual standard deviations) and when their prices are highly correlated (high p), as the benefits of switching between fuels to reduce costs are minimized.

Consider an Electric Utility That May Use Either Coal or Natural