Electricity price modeling and asset valuation: a multi-fuel structural approach

DOI10.1007/S11579-012-0091-4zbMATH Open1269.91037arXiv1205.2299OpenAlexW2123346183MaRDI QIDQ356476FDOQ356476

René Carmona, Daniel Schwarz, Michael Coulon

Publication date: 25 July 2013

Published in: Mathematics and Financial Economics (Search for Journal in Brave)

Abstract: 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.

Full work available at URL: https://arxiv.org/abs/1205.2299

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zbMATH Keywords

electricity marketsspread optionsforward pricespower plant valuationstructural model

Mathematics Subject Classification ID

Economic time series analysis (91B84) Microeconomic theory (price theory and economic markets) (91B24) Special types of economic markets (including Cournot, Bertrand) (91B54)

Cites Work

• Stochastic modeling of electricity and related markets.
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• A DIFFUSION MODEL FOR ELECTRICITY PRICES
• Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality
• Modelling Electricity Prices with Forward Looking Capacity Constraints
• A structural risk-neutral model of electricity prices
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• Joint Modelling of Gas and Electricity Spot Prices

Cited In (11)

• Electricity spot price modeling by multi-factor uncertain process: a case study from the Nordic region
• Dynamic Electricity Pricing to Smart Homes
• Utility indifference valuation for non-smooth payoffs with an application to power derivatives
• Joint Modelling of Gas and Electricity Spot Prices
• A non-parametric structural hybrid modeling approach for electricity prices
• Structural Electricity Models and Asymptotically Normal Estimators to Quantify Parameter Risk
• Forward price and fitting of electricity Nord Pool market under regime-switching two-factor model
• Electricity derivatives pricing with forward-looking information
• A structural risk-neutral model of electricity prices
• Modelling locational price spreads in competitive electricity markets; applications for transmission rights valuation and replication
• Model Uncertainty in Commodity Markets

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