The valuation of power futures based on optimal dispatch

Gauthier de Maere D’aertrycke, () and Yves Smeers ()
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Gauthier de Maere D’aertrycke,: Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)
Yves Smeers: Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)
Authors registered in the RePEc Author Service: Gauthier de Maere d'Aertrycke

No 2009014, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: The pricing of contingent claims in the wholesale power market is a controversial topic. Important challenges come from the non-storability of electricity and the number of parameters that impact the market. We propose an equilibrium model based on the fundamentals of power generation. In a perfect competitive market, spot electricity prices are determined by the marginal cost of producing the last unit of power. Electricity can be viewed as a derivative of demand, fuels prices and carbon emission price. We extend the Pirrong-Jermakayan model such as to incorporate the main factors driving the marginal cost and the non-linearities of electricity prices with respect to fuels prices. As in the Pirrong-Jermakayan framework, any contingent claims on power must satisfy a high dimensional PDE that embeds a market price of risk, as load is not a traded asset. Analyzing the specificity of the marginal cost in power market, we simplify the problem for evaluating power futures so that it becomes computationally tractable. We test our model on the German EEX for "German Month Futures" with maturity of June and September 2008.

Keywords: power contingent claims; PDE valuation of financial derivatives; unit commitment; market price of risk; EEX (search for similar items in EconPapers)
JEL-codes: C61 G13 (search for similar items in EconPapers)
Date: 2009-03-01
New Economics Papers: this item is included in nep-ene
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