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Gas storage valuation in incomplete markets

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  • Löhndorf, Nils
  • Wozabal, David

Abstract

Natural gas storage valuation is an important problem in energy trading, yet most valuation approaches are based on heuristics or ignore that gas markets are incomplete. We propose an exact valuation model for incomplete gas markets based on multistage stochastic programming. Market incompleteness structurally changes the problem of storage valuation and asset backed trading and the resulting model requires analysis of a combined control problem of storage operation and futures trading that takes risk preferences into account. As the problem is subject to the curse of dimensionality, we reduce the stochastic process to a scenario lattice and solve the resulting problem using stochastic dual dynamic programming. We show that the intrinsic value of storage corresponds to the value under perfect risk aversion and that the rolling intrinsic value, which is popular among practitioners and has been found to be near-optimal when markets are complete, is an inconsistent price rule in incomplete markets. Our results inform managerial decisions on risk management and asset pricing for natural gas highlighting the importance of explicitly modeling risk preferences.

Suggested Citation

  • Löhndorf, Nils & Wozabal, David, 2021. "Gas storage valuation in incomplete markets," European Journal of Operational Research, Elsevier, vol. 288(1), pages 318-330.
    • Handle: RePEc:eee:ejores:v:288:y:2021:i:1:p:318-330
    DOI: 10.1016/j.ejor.2020.05.044
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    References listed on IDEAS

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    3. Kiszka, Adriana & Wozabal, David, 2025. "Stochastic dual dynamic programming for optimal power flow problems under uncertainty," European Journal of Operational Research, Elsevier, vol. 321(3), pages 814-836.
    4. David Schaurecker & David Wozabal & Nils Lohndorf & Thorsten Staake, 2025. "Maximizing Battery Storage Profits via High-Frequency Intraday Trading," Papers 2504.06932, arXiv.org, revised Aug 2025.
    5. Shinde, Priyanka & Aravena, Ignacio, 2026. "A bilevel multistage stochastic self-scheduling model with indivisibilities for trading in the continuous intraday electricity market," European Journal of Operational Research, Elsevier, vol. 328(3), pages 966-988.
    6. Palma, Alessia & Paltrinieri, Andrea & Goodell, John W. & Oriani, Marco Ercole, 2024. "The black box of natural gas market: Past, present, and future," International Review of Financial Analysis, Elsevier, vol. 94(C).
    7. Nadarajah, Selvaprabu & Secomandi, Nicola, 2023. "A review of the operations literature on real options in energy," European Journal of Operational Research, Elsevier, vol. 309(2), pages 469-487.
    8. Jean-Philippe Chancelier & Michel De Lara & Tanguy Lindegaard & François Pacaud & Teemu Pennanen & Ari-Pekka Perkkiö, 2026. "Optimal operation and valuation of electricity storage systems in intraday markets," Computational Management Science, Springer, vol. 23(1), pages 1-25, June.

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