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Monte Carlo valuation of natural gas investments

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  • Abadie, Luis M.
  • Chamorro, José M.

Abstract

In this evaluation of energy assets related to natural gas, our particular focus is on a base load natural gas combined cycle power plant and a liquefied natural gas facility in a realistic setting. We also value several American-type investment options following the least squares Monte Carlo approach. We calibrate mean-reverting stochastic processes for gas and electricity prices by using data from NYMEX NG futures contracts and the Spanish wholesale electricity market, respectively. Additional sources of uncertainty concern the initial investment outlay, or the option's time to maturity, or the cost of CO2 emission permits.

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Bibliographic Info

Article provided by Elsevier in its journal Review of Financial Economics.

Volume (Year): 18 (2009)
Issue (Month): 1 (January)
Pages: 10-22

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Handle: RePEc:eee:revfin:v:18:y:2009:i:1:p:10-22

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Web page: http://www.elsevier.com/locate/inca/620170

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Keywords: Real options Power plants Stochastic revenues and costs CO2 allowances LNG;

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  1. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-47.
  2. Alvaro Cartea & Thomas Williams, 2006. "UK Gas Markets: the Market Price of Risk and Applications to Multiple Interruptible Supply Contracts," Birkbeck Working Papers in Economics and Finance 0608, Birkbeck, Department of Economics, Mathematics & Statistics.
  3. Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March.
  4. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
  5. Jaime Casassus & Pierre Collin-Dufresne, 2005. "Stochastic Convenience Yield Implied from Commodity Futures and Interest Rates," Journal of Finance, American Finance Association, vol. 60(5), pages 2283-2331, October.
  6. Pavel Diko & Steve Lawford & Valerie Limpens, 2006. "Risk Premia in Electricity Forward Prices," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(3), pages 7.
  7. Cortazar, Gonzalo & Schwartz, Eduardo S., 2003. "Implementing a stochastic model for oil futures prices," Energy Economics, Elsevier, vol. 25(3), pages 215-238, May.
  8. Dagobert L. Brito & Peter R. Hartley, 2007. "Expectations and the Evolving World Gas Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-24.
  9. Margaret Insley, 2002. "On the option to invest in pollution control under a regime of tradable emissions allowances," Working Papers 02008, University of Waterloo, Department of Economics, revised Jan 2002.
  10. Nasakkala, Erkka & Fleten, Stein-Erik, 2005. "Flexibility and technology choice in gas fired power plant investments," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 371-393.
  11. Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-73, July.
  12. Sarkar, Sudipto, 2003. "The effect of mean reversion on investment under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 377-396, November.
  13. Abadie, Luis M. & Chamorro, José M., 2008. "European CO2 prices and carbon capture investments," Energy Economics, Elsevier, vol. 30(6), pages 2992-3015, November.
  14. Malcolm P. Baker & E. Scott Mayfield & John E. Parsons, 1998. "Alternative Models of Uncertain Commodity Prices for Use with Modern Asset Pricing Methods," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 115-148.
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Cited by:
  1. GAHUNGU, Joachim & SMEERS, Yves, 2011. "A real options model for electricity capacity expansion," CORE Discussion Papers 2011044, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Hervé-Mignucci, Morgan, 2011. "Rôle du signal prix du carbone sur les décisions d'investissement des entreprises," Open Access publications from Université Paris-Dauphine urn:hdl:123456789/8200, Université Paris-Dauphine.
  3. Joachim Gahungu and Yves Smeers, 2012. "A Real Options Model for Electricity Capacity Expansion," RSCAS Working Papers 2012/08, European University Institute.
  4. Arvesen, Øystein & Medbø, Vegard & Fleten, Stein-Erik & Tomasgard, Asgeir & Westgaard, Sjur, 2012. "Linepack storage valuation under price uncertainty," MPRA Paper 43270, University Library of Munich, Germany.

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