Gas Storage Valuation Under Limited Market Liquidity: An Application In Germany
AbstractNatural gas storages may be valuated by applying real options theory. However it is crucial, not to ignore that most evolving gas spot markets, like the German spot market, lack of liquidity. 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 within this paper proposed methodology 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.
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Bibliographic InfoPaper provided by University of Duisburg-Essen, Chair for Management Science and Energy Economics in its series EWL Working Papers with number 0903.
Length: 24 pages
Date of creation: Oct 2009
Date of revision: Oct 2009
natural gas valuation; limited liquidity;
Find related papers by JEL classification:
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
- Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-24 (All new papers)
- NEP-ENE-2010-07-24 (Energy Economics)
- NEP-EUR-2010-07-24 (Microeconomic European Issues)
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- Chaton, Corinne & Durand-Viel, Laure, 2013. "Real Asset Valuation under Imperfect Competition: Can We Forget About Market Fundamentals?," Economics Papers from University Paris Dauphine 123456789/11439, Paris Dauphine University.
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