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 most 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 most valuable when both coal and natural gas prices are highly volatile (high standard deviations) and when their prices are not strongly correlated (low p), allowing the utility to switch between fuels to take advantage of price differences.

Consider an Electric Utility That May Use Either Coal or Natural