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A Real Options Approach For Pricing Electricity Tolling Agreements

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Author Info

  • SHI-JIE DENG

    ()
    (School of Industrial & Systems Engineering, Georgia Institute of Technology, 765 Ferst Drive, Atlanta, GA 30332, USA)

  • ZHENDONG XIA

    ()
    (BP Energy Company, Houston, TX, USA)

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    Abstract

    An electricity tolling agreement (or, tolling contact) is a supply contract in which the buyer reserves the right to take the output of an underlying electricity generation asset by paying a predetermined premium to the asset owner. We propose a real options approach to value a tolling contract incorporating operational characteristics of the generation asset and contractual constraints. Dynamic programming and value function approximation by Monte Carlo based least-squares regression are employed to solve the valuation problem. The effects of different electricity price assumptions on the valuation of tolling contracts are examined through numerical examples.

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    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Information Technology and Decision Making.

    Volume (Year): 05 (2006)
    Issue (Month): 03 ()
    Pages: 421-436

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    Handle: RePEc:wsi:ijitdm:v:05:y:2006:i:03:p:421-436

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    Related research

    Keywords: Electricity options pricing; tolling agreement; spark spread; real options; risk management; Monte Carlo simulation;

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    Cited by:
    1. Chi-Keung Woo, Ira Horowitz, Brian Horii, Ren Orans, and Jay Zarnikau, 2012. "Blowing in the Wind: Vanishing Payoffs of a Tolling Agreement for Natural-gas-fired Generation of Electricity in Texas," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    2. Fernandes, Bartolomeu & Cunha, Jorge & Ferreira, Paula, 2011. "The use of real options approach in energy sector investments," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(9), pages 4491-4497.

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