A [`]simple' hybrid model for power derivatives

Matthew R. Lyle and Robert J. Elliott

Energy Economics, 2009, vol. 31, issue 5, pages 757-767

Abstract: This paper presents a method for valuing power derivatives using a supply-demand approach. Our method extends work in the field by incorporating randomness into the base load portion of the supply stack function and equating it with a noisy demand process. We obtain closed form solutions for European option prices written on average spot prices considering two different supply models: a mean-reverting model and a Markov chain model. The results are extensions of the classic Black-Scholes equation. The model provides a relatively simple approach to describe the complicated price behaviour observed in electricity spot markets and also allows for computationally efficient derivatives pricing.

Keywords: Electricity; pricing; Power; derivatives; Seasonality (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:eneeco:v:31:y:2009:i:5:p:757-767

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