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Gas Storage Valuation: Price Modelling v. Optimization Methods

Petter Bjerksund, Gunnar Stensland and Frank Vagstad

The Energy Journal, 2011, vol. Volume 32, issue Number 1, 203-228

Abstract: In the literature, one approach is to analyse gas storage within a simple one-factor price dynamics framework that is solved to optimality. We follow an alternative 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. Based on UK natural gas market price data, we obtain the gas storage value using our approach, and compare with results from a one-factor model as well as with perfect foresight. We find that our approach captures much more of the true flexibility value than the one-factor model.

JEL-codes: F0 (search for similar items in EconPapers)
Date: 2011
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