Linepack storage valuation under price uncertainty
Natural gas flows in pipelines as a consequence of the pressure difference at the inlet and outlet. Adjusting these pressures makes it possible to inject natural gas at one rate and withdraw at a different rate, hence using the pipeline as storage as well as transport. We study the value of using the so called pipeline linepack as a short-term gas storage and how this functionality may offset the discrepancy between the low flexibility in take-or-pay contracts and the high inherent flexibility of a gas fired power plant. To value the storage option, we consider a cycling power plant facing volatile power prices while purchasing gas on a take-or-pay contract. We estimate a Markov regime-switching model for power prices and a mean reverting jump diffusion model for gas prices. Applying Least Squares Monte Carlo simulation to the operation of the power plant, we find that the storage option indeed has significant value for the plant, enabling it to better exploit the sometimes extreme price fluctuations. Finally, we show how power price volatility and jump frequency are the main value drivers, and that the size of the storage increases the value up to a point where no additional flexibility is used.
|Date of creation:||07 Nov 2012|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kang, Charles A. & Brandt, Adam R. & Durlofsky, Louis J., 2011. "Optimal operation of an integrated energy system including fossil fuel power generation, CO2 capture and wind," Energy, Elsevier, vol. 36(12), pages 6806-6820.
- Petter Bjerksund & Gunnar Stensland & Frank Vagstad, 2011.
"Gas Storage Valuation: Price Modelling v. Optimization Methods,"
The Energy Journal,
International Association for Energy Economics, vol. 0(Number 1), pages 203-228.
- Bjerksund, Petter & Stensland, Gunnar & Vagstad, Frank, 2008. "Gas Storage Valuation: Price Modelling v. Optimization Methods," Discussion Papers 2008/20, Department of Business and Management Science, Norwegian School of Economics.
- Fleten, Stein-Erik & Maribu, Karl Magnus & Wangensteen, Ivar, 2005.
"Optimal investment strategies in decentralized renewable power generation under uncertainty,"
218, University Library of Munich, Germany, revised Jun 2006.
- Fleten, S.-E. & Maribu, K.M. & Wangensteen, I., 2007. "Optimal investment strategies in decentralized renewable power generation under uncertainty," Energy, Elsevier, vol. 32(5), pages 803-815.
- Joanna Janczura & Rafał Weron, 2012. "Efficient estimation of Markov regime-switching models: An application to electricity spot prices," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 96(3), pages 385-407, July.
- Sun, Xiaojing & Huang, Diangui & Wu, Guoqing, 2012. "The current state of offshore wind energy technology development," Energy, Elsevier, vol. 41(1), pages 298-312.
- van Dyken, Silke & Bakken, Bjorn H. & Skjelbred, Hans I., 2010. "Linear mixed-integer models for biomass supply chains with transport, storage and processing," Energy, Elsevier, vol. 35(3), pages 1338-1350.
- Won, Chaehwan, 2009. "Valuation of investments in natural resources using contingent-claim framework with application to bituminous coal developments in Korea," Energy, Elsevier, vol. 34(9), pages 1215-1224.
- Chamorro Gómez, José Manuel & Abadie, Luis M., 2006.
"Monte Carlo Valuation of natural gas investments,"
2006-25, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
- Nicola Secomandi, 2010. "On the Pricing of Natural Gas Pipeline Capacity," Manufacturing & Service Operations Management, INFORMS, vol. 12(3), pages 393-408, October.
- Lochner, Stefan, 2011. "Identification of congestion and valuation of transport infrastructures in the European natural gas market," Energy, Elsevier, vol. 36(5), pages 2483-2492.
- Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
- De Jong Cyriel, 2006. "The Nature of Power Spikes: A Regime-Switch Approach," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(3), pages 1-28, September.
- Keyaerts, Nico & Hallack, Michelle & Glachant, Jean-Michel & D'haeseleer, William, 2011. "Gas market distorting effects of imbalanced gas balancing rules: Inefficient regulation of pipeline flexibility," Energy Policy, Elsevier, vol. 39(2), pages 865-876, February.
- Siddiqui, Afzal S. & Marnay, Chris, 2008. "Distributed generation investment by a microgrid under uncertainty," Energy, Elsevier, vol. 33(12), pages 1729-1737.
- Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
- Tan, Hongbo & Li, Yanzhong & Tuo, Hanfei & Zhou, Man & Tian, Baocong, 2010. "Experimental study on liquid/solid phase change for cold energy storage of Liquefied Natural Gas (LNG) refrigerated vehicle," Energy, Elsevier, vol. 35(5), pages 1927-1935.
- Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
- Schneider, Stefan & Schneider, Stefan, 2010. "Power Spot Price Models with negative Prices," MPRA Paper 29958, University Library of Munich, Germany.
- Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-147.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:43270. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.