UK gas markets: The market price of risk and applications to multiple interruptible supply contracts

Álvaro Cartea () and Thomas Williams

Energy Economics, 2008, vol. 30, issue 3, pages 829-846

Abstract: We employ the Schwartz and Smith [Schwartz, E., and J. Smith, 2000, Short-term variations and long-term dynamics in commodity prices, Management Science 46, 893-911.] model to explore the dynamics of the UK gas markets. We discuss in detail the short-term and long-term market prices of risk borne by the market players and how deviations from expected cyclical storage affect the short-term market price of risk. Finally, we illustrate an application of the model by pricing interruptible supply contracts that are currently traded in the UK.

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Related works:
Working Paper: UK Gas Markets: the Market Price of Risk and Applications to Multiple Interruptible Supply Contracts (2006)
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