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Gas Storage Valuation: Price Modelling v. Optimization Methods

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  • Petter Bjerksund
  • Gunnar Stensland
  • Frank Vagstad

Abstract

In the literature, one approach is to analyse gas storage within a simple one-factor price dynamics framework that is solved to optimality. We follow an alternative approach, where the market is represented by a forward curve with daily granularity, the price uncertainty is represented by six factors, and where we impose a simple and intuitive storage strategy. Based on UK natural gas market price data, we obtain the gas storage value using our approach, and compare with results from a one-factor model as well as with perfect foresight. We find that our approach captures much more of the true flexibility value than the one-factor model.

Suggested Citation

  • Petter Bjerksund & Gunnar Stensland & Frank Vagstad, 2011. "Gas Storage Valuation: Price Modelling v. Optimization Methods," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 203-228.
    • Handle: RePEc:aen:journl:2011v32-01-a08
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    1. Robert A. Jarrow, 2009. "The Term Structure of Interest Rates," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 69-96, November.
    2. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
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    1. repec:wsi:ijtafx:v:20:y:2017:i:01:n:s0219024917500042 is not listed on IDEAS
    2. Patrick Henaff & Ismail Laachir & Francesco Russo, 2013. "Gas storage valuation and hedging. A quantification of the model risk," Papers 1312.3789, arXiv.org.
    3. Monica Giulietti, Luigi Grossi, and Michael Waterson, 2012. "A Rough Analysis: Valuing Gas Storage," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    4. Arvesen, Ø. & Medbø, V. & Fleten, S.-E. & Tomasgard, A. & Westgaard, S., 2013. "Linepack storage valuation under price uncertainty," Energy, Elsevier, vol. 52(C), pages 155-164.
    5. Steffen, Bjarne & Weber, Christoph, 2016. "Optimal operation of pumped-hydro storage plants with continuous time-varying power prices," European Journal of Operational Research, Elsevier, vol. 252(1), pages 308-321.
    6. Nemat Safarov & Colin Atkinson, 2016. "Natural gas-fired power plants valuation and optimisation under Levy copulas and regime-switching," Papers 1607.01207, arXiv.org, revised Jul 2016.
    7. Secomandi, Nicola, 2016. "A tutorial on portfolio-based control algorithms for merchant energy trading operations," Journal of Commodity Markets, Elsevier, vol. 4(1), pages 1-13.
    8. Secomandi, Nicola & Seppi, Duane J., 2014. "Real Options and Merchant Operations of Energy and Other Commodities," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 6(3-4), pages 161-331, July.
    9. Giulietti, Monica & Grossi, Luigi & Waterson, Michael, 2011. "A Rough Examination of the value of gas storage," The Warwick Economics Research Paper Series (TWERPS) 967, University of Warwick, Department of Economics.
    10. Felix, Bastian Joachim & Weber, Christoph, 2012. "Gas storage valuation applying numerically constructed recombining trees," European Journal of Operational Research, Elsevier, vol. 216(1), pages 178-187.
    11. Misund, Bård & Oglend, Atle, 2016. "Supply and demand determinants of natural gas price volatility in the U.K.: A vector autoregression approach," Energy, Elsevier, vol. 111(C), pages 178-189.
    12. Fleten, Stein-Erik & Bråthen, Espen & Nissen-Meyer, Sigurd-Erik, 2010. "Evaluation of static hedging strategies for hydropower producers in the Nordic market," MPRA Paper 27133, University Library of Munich, Germany.
    13. Bastian Felix, 2012. "Gas Storage Valuation: A Comparative Simulation Study," EWL Working Papers 1201, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Apr 2014.
    14. Steffen, Bjarne & Weber, Christoph, 2013. "Efficient storage capacity in power systems with thermal and renewable generation," Energy Economics, Elsevier, vol. 36(C), pages 556-567.

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    JEL classification:

    • F0 - International Economics - - General

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