Gas storage valuation under limited market liquidity: an application in Germany

Bastian Felix, Oliver Woll and Christoph Weber

The European Journal of Finance, 2013, vol. 19, issue 7-8, 715-733

Abstract: Natural gas storages may be valued by applying real options theory. However, it is crucial to take into account that most evolving gas markets, like the German spot market, lack liquidity. This implies that large-scale operation of storages reduces the achievable operating margin since storage operators will pay higher prices for injected gas and earn less on withdrawn gas. Optimal storage operation will take this into account. In this context, considering storage operators as price takers does not account for interdependencies of storage operations and market prices. This paper offers a novel approach to storage valuation taking into account the effect of management decisions on market prices. The methodology proposed within this paper determines the optimal production schedule and value by determining the stochastic differential equation describing the storage value and then applying a finite difference scheme. We find that limited liquidity lowers the storage value and reduces withdrawal and injection amounts. Further, we observe decreasing reservation prices for injection and withdrawing for growing illiquidity resulting in a left shift of injection and withdrawing threshold prices.

Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://hdl.handle.net/10.1080/1351847X.2012.681793 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: GAS STORAGE VALUATION UNDER LIMITED MARKET LIQUIDITY: AN APPLICATION IN GERMANY (2009)
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:taf:eurjfi:v:19:y:2013:i:7-8:p:715-733

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/REJF20

DOI: 10.1080/1351847X.2012.681793

Access Statistics for this article

The European Journal of Finance is currently edited by Chris Adcock

More articles in The European Journal of Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().