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A Real Options Approach For Pricing Electricity Tolling Agreements

  • SHI-JIE DENG

    ()

    (School of Industrial & Systems Engineering, Georgia Institute of Technology, 765 Ferst Drive, Atlanta, GA 30332, USA)

  • ZHENDONG XIA

    ()

    (BP Energy Company, Houston, TX, USA)

Registered author(s):

    An electricity tolling agreement (or, tolling contact) is a supply contract in which the buyer reserves the right to take the output of an underlying electricity generation asset by paying a predetermined premium to the asset owner. We propose a real options approach to value a tolling contract incorporating operational characteristics of the generation asset and contractual constraints. Dynamic programming and value function approximation by Monte Carlo based least-squares regression are employed to solve the valuation problem. The effects of different electricity price assumptions on the valuation of tolling contracts are examined through numerical examples.

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    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Information Technology and Decision Making.

    Volume (Year): 05 (2006)
    Issue (Month): 03 ()
    Pages: 421-436

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    Handle: RePEc:wsi:ijitdm:v:05:y:2006:i:03:p:421-436
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