IDEAS home Printed from https://ideas.repec.org/p/cor/louvco/2009014.html
   My bibliography  Save this paper

The valuation of power futures based on optimal dispatch

Author

Listed:
  • DE MAERE D’AERTRYCKE, Gauthier

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

  • SMEERS, Yves

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

Abstract

The pricing of contingent claims in the wholesale power market is a controversial topic. Important challenges come from the non-storability of electricity and the number of parameters that impact the market. We propose an equilibrium model based on the fundamentals of power generation. In a perfect competitive market, spot electricity prices are determined by the marginal cost of producing the last unit of power. Electricity can be viewed as a derivative of demand, fuels prices and carbon emission price. We extend the Pirrong-Jermakayan model such as to incorporate the main factors driving the marginal cost and the non-linearities of electricity prices with respect to fuels prices. As in the Pirrong-Jermakayan framework, any contingent claims on power must satisfy a high dimensional PDE that embeds a market price of risk, as load is not a traded asset. Analyzing the specificity of the marginal cost in power market, we simplify the problem for evaluating power futures so that it becomes computationally tractable. We test our model on the German EEX for "German Month Futures" with maturity of June and September 2008.

Suggested Citation

  • DE MAERE D’AERTRYCKE, Gauthier & SMEERS, Yves, 2009. "The valuation of power futures based on optimal dispatch," LIDAM Discussion Papers CORE 2009014, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2009014
    as

    Download full text from publisher

    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2009.html
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    power contingent claims; PDE valuation of financial derivatives; unit commitment; market price of risk; EEX;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cor:louvco:2009014. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Alain GILLIS (email available below). General contact details of provider: https://edirc.repec.org/data/coreebe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.