Electricity Market Coupling and the Pricing of Transmission Rights: An Option-based Approach

Steffen Mahringer (), Roland Fuess () and Marcel Prokopczuk ()
Authors registered in the RePEc Author Service: Roland Füss ()

No 1512, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: In liberalized electricity wholesale markets, transmission rights valuation and market design have traditionally been closely intertwined. In Europe, where transmission rights are mainly related to cross-border transactions between adjacent markets, the recent roll-out of market coupling mechanisms has even further strengthened this mutual dependence: due to the resulting improved price convergence across coupled markets, spread dynamics have become more intricate and complex to model, which cannot generally be achieved with classic reduced-form approaches commonly used for transmission rights valuation. In this paper, we instead propose a fundamental model for electricity prices in two coupled markets, which adequately reflects the current institutional framework for cross-border trade in Europe. Based on this setting, we analyze in detail how transmission rights can be valued as spread options on the spot prices derived from this framework, and illustrate how related pricing implications compare against the standard Margrabe benchmark.

Keywords: Transmission Rights Valuation; Fundamental Model; Multi-Market Modeling; Derivatives Pricing; Energy Market Coupling (search for similar items in EconPapers)
JEL-codes: G12 G13 Q4 Q41 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2015-06
New Economics Papers: this item is included in nep-ene
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2015:12

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