GAS STORAGE VALUATION UNDER LIMITED MARKET LIQUIDITY: AN APPLICATION IN GERMANY

Bastian Felix (), Oliver Woll and Christoph Weber
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Bastian Felix: Chair for Management Sciences and Energy Economics, University of Duisburg-Essen

No 903, EWL Working Papers from University of Duisburg-Essen, Chair for Management Science and Energy Economics

Abstract: Natural gas storages may be valuated by applying real options theory. However it is crucial, not to ignore that most evolving gas spot markets, like the German spot market, lack of liquidity. In this context, considering storage operators as price takers does not account for interdependencies of storage operations and market prices. This paper offers a novel approach to storage valuation taking into account the effect of management decisions on market prices. The within this paper proposed methodology determines the optimal production schedule and value by determining the stochastic differential equation describing the storage value and then applying a finite difference scheme. We find that limited liquidity lowers the storage value and reduces withdrawal and injection amounts. Further, we observe decreasing reservation prices for injection and withdrawing for growing illiquidity resulting in a left shift of injection and withdrawing threshold prices.

Keywords: natural gas valuation; limited liquidity (search for similar items in EconPapers)
JEL-codes: D52 Q40 Q41 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2009-10, Revised 2009-10
New Economics Papers: this item is included in nep-ene and nep-eur
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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http://www.wiwi.uni-due.de/fileadmin/fileupload/BW ... dMarketLiquidity.pdf First version, 2009 (application/pdf)

Related works:
Journal Article: Gas storage valuation under limited market liquidity: an application in Germany (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:dui:wpaper:0903

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