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Gas Storage Valuation: Price Modelling v. Optimization Methods

Author

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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, , vol. 32(1), pages 203-228, January.
    • Handle: RePEc:sae:enejou:v:32:y:2011:i:1:p:203-228
    DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No1-8
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    Cited by:

    1. Mark Cummins & Fabian Gogolin & Fearghal Kearney & Greg Kiely & Bernard Murphy, 2023. "Practice-relevant model validation: distributional parameter risk analysis in financial model risk management," Annals of Operations Research, Springer, vol. 330(1), pages 431-455, November.
    2. Nemat Safarov & Colin Atkinson, 2017. "Natural Gas-Fired Power Plants Valuation And Optimization Under Lévy Copulas And Regime Switching," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 20(01), pages 1-38, February.
    3. 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.
    4. Patrick Hénaff & Ismail Laachir & Francesco Russo, 2018. "Gas Storage Valuation and Hedging: A Quantification of Model Risk," IJFS, MDPI, vol. 6(1), pages 1-27, March.
    5. 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.
    6. Cummins, Mark & Kiely, Greg & Murphy, Bernard, 2018. "Gas storage valuation under multifactor Lévy processes," Journal of Banking & Finance, Elsevier, vol. 95(C), pages 167-184.
    7. Stein-Erik Fleten & Espen Bråthen & Sigurd-Erik Nissen-Meyer, . "Evaluation of static hedging strategies for hydropower producers in the Nordic market," Journal of Energy Markets, Journal of Energy Markets.

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    JEL classification:

    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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