Gas Storage Valuation: Price Modelling v. Optimization Methods

Petter Bjerksund, Gunnar Stensland and Frank Vagstad ()
Additional contact information
Frank Vagstad: Viz Risk Management, Postal: Viz Risk Management Services AS, P.B 6216, NO-5893 Bergen, Norway

No 2008/20, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: The existence of a financial gas market motivates the analysis of gas storage as a separate asset, using the market value context for utilization and valuation. In the recent literature, gas storage is typically analysed within a framework with a simple one-factor price dynamics that is solved to optimality. We follow a different approach, where the market is represented by a forward curve with daily granularity, the price uncertainty is represented by six factors, and where we impose a simple and intuitive storage strategy that follows from repeated maximization of the intrinsic value.

Based on UK natural gas market price data, we obtain the gas storage value using our approach, and compare with results from one-factor models as well as with perfect foresight. We find that our approach captures much more of the true flexibility value than the one-factor models. Our results indicate that the appropriate framework for analyzing complex assets like gas storage is a rich representation of the price dynamics combined with a simple and intuitive decision rule.

Keywords: Energy; uncertainty; flexibility; exercise strategy (search for similar items in EconPapers)
JEL-codes: Q40 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2008-10-17
New Economics Papers: this item is included in nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://hdl.handle.net/11250/163950 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://hdl.handle.net/11250/163950 [302 Found]--> https://www.unit.no/brage-denne-lenken-er-ikke-lenger-gyldig [301 Moved Permanently]--> https://sikt.no/brage-denne-lenken-er-ikke-lenger-gyldig)

Related works:
Journal Article: Gas Storage Valuation: Price Modelling v. Optimization Methods (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:nhhfms:2008_020

Access Statistics for this paper

More papers in Discussion Papers from Norwegian School of Economics, Department of Business and Management Science NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway. Contact information at EDIRC.
Bibliographic data for series maintained by Stein Fossen ().