  We introduce a new and highly tractable structural model for spot and
derivative prices in electricity markets. Using a stochastic model of the bid
stack, we translate the demand for power and the prices of generating fuels
into electricity spot prices. The stack structure allows for a range of
generator efficiencies per fuel type and for the possibility of future changes
in the merit order of the fuels. The derived spot price process captures
important stylized facts of historical electricity prices, including both
spikes and the complex dependence upon its underlying supply and demand
drivers. Furthermore, under mild and commonly used assumptions on the
distributions of the input factors, we obtain closed-form formulae for
electricity forward contracts and for spark and dark spread options. As merit
order dynamics and fuel forward prices are embedded into the model, we capture
a much richer and more realistic dependence structure than can be achieved by
classical reduced-form models. We illustrate these advantages by comparing with
Margrabe's formula and a simple cointegration model, and highlight important
implications for the valuation of power plants.
