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Electricity Market Coupling and the Pricing of Transmission Rights: An Option-based Approach

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  • Mahringer, Steffen

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  • Fuess, Roland

    ()

  • Prokopczuk, Marcel

    ()

Abstract

In liberalized electricity wholesale markets, transmission rights valuation and market design have traditionally been closely intertwined. In Europe, where transmission rights are mainly related to cross-border transactions between adjacent markets, the recent roll-out of market coupling mechanisms has even further strengthened this mutual dependence: due to the resulting improved price convergence across coupled markets, spread dynamics have become more intricate and complex to model, which cannot generally be achieved with classic reduced-form approaches commonly used for transmission rights valuation. In this paper, we instead propose a fundamental model for electricity prices in two coupled markets, which adequately reflects the current institutional framework for cross-border trade in Europe. Based on this setting, we analyze in detail how transmission rights can be valued as spread options on the spot prices derived from this framework, and illustrate how related pricing implications compare against the standard Margrabe benchmark.

Suggested Citation

  • Mahringer, Steffen & Fuess, Roland & Prokopczuk, Marcel, 2015. "Electricity Market Coupling and the Pricing of Transmission Rights: An Option-based Approach," Working Papers on Finance 1512, University of St. Gallen, School of Finance.
  • Handle: RePEc:usg:sfwpfi:2015:12
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    References listed on IDEAS

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    Cited by:

    1. Kiesel, Rüdiger & Kusterman, Michael, 2016. "Structural models for coupled electricity markets," Journal of Commodity Markets, Elsevier, vol. 3(1), pages 16-38.

    More about this item

    Keywords

    Transmission Rights Valuation; Fundamental Model; Multi-Market Modeling; Derivatives Pricing; Energy Market Coupling;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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