Consider an electric utility that may use either coal or natural gas to generate electricity. Under which of the following conditions would it be most valuable to have co-firing equipment? 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 the standard deviations of coal and natural gas prices are high and the correlation between them is low. This is because co-firing allows the utility to switch between coal and natural gas depending on which fuel is cheaper at the time, which can save money.

Consider an Electric Utility That May Use Either Coal or Natural