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Arbitrage conditions for electricity markets with production and storage

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  • Raimund M. Kovacevic

    (Vienna University of Technology)

Abstract

This work analyzes the notion of arbitrage for market models with electricity production from fuel. Several generators, fuel storage, and the related fuel and storage costs are considered. Based on stochastic optimization in Banach spaces, a necessary and a sufficient no-arbitrage condition in terms of stochastic discount factors are derived and analyzed further in the context of (potentially nonlinear) vector-autoregressive price models with additive residuals. For this large class of statistical models, it is found that both the necessary and the sufficient condition can be rejected only in very rare cases. Based on these results, it is demonstrated how absence of arbitrage can be used to construct superhedging based valuation formulas for physical electricity delivery contracts, and that absence of arbitrage in tree-based stochastic programming can be ensured easier in the context of electricity production than in a purely financial context.

Suggested Citation

  • Raimund M. Kovacevic, 2019. "Arbitrage conditions for electricity markets with production and storage," Computational Management Science, Springer, vol. 16(4), pages 671-696, October.
    • Handle: RePEc:spr:comgts:v:16:y:2019:i:4:d:10.1007_s10287-019-00347-3
    DOI: 10.1007/s10287-019-00347-3
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    References listed on IDEAS

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    1. Back, Kerry, 2010. "Asset Pricing and Portfolio Choice Theory," OUP Catalogue, Oxford University Press, number 9780195380613.
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    3. Geyer, Alois & Hanke, Michael & Weissensteiner, Alex, 2010. "No-arbitrage conditions, scenario trees, and multi-asset financial optimization," European Journal of Operational Research, Elsevier, vol. 206(3), pages 609-613, November.
    4. Nowotarski, Jakub & Weron, Rafał, 2018. "Recent advances in electricity price forecasting: A review of probabilistic forecasting," Renewable and Sustainable Energy Reviews, Elsevier, vol. 81(P1), pages 1548-1568.
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    6. Raimund M. Kovacevic & Georg Ch. Pflug & Maria Teresa Vespucci (ed.), 2013. "Handbook of Risk Management in Energy Production and Trading," International Series in Operations Research and Management Science, Springer, edition 127, number 978-1-4614-9035-7, December.
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