A REAL OPTIONS APPROACH FOR PRICING ELECTRICITY TOLLING AGREEMENTS

Shi-Jie Deng () and Zhendong Xia ()
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Shi-Jie Deng: School of Industrial & Systems Engineering, Georgia Institute of Technology, 765 Ferst Drive, Atlanta, GA 30332, USA
Zhendong Xia: BP Energy Company, Houston, TX, USA

International Journal of Information Technology & Decision Making (IJITDM), 2006, vol. 05, issue 03, 421-436

Abstract: An electricity tolling agreement (or, tolling contact) is a supply contract in which the buyer reserves the right to take the output of an underlying electricity generation asset by paying a predetermined premium to the asset owner. We propose a real options approach to value a tolling contract incorporating operational characteristics of the generation asset and contractual constraints. Dynamic programming and value function approximation by Monte Carlo based least-squares regression are employed to solve the valuation problem. The effects of different electricity price assumptions on the valuation of tolling contracts are examined through numerical examples.

Keywords: Electricity options pricing; tolling agreement; spark spread; real options; risk management; Monte Carlo simulation (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (13)

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DOI: 10.1142/S0219622006002039

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