A ‘simple’ hybrid model for power derivatives

Date
2009
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier
Abstract
This paper presents a method for valuing power derivatives using a supply–demand approach. Our method extends work in the field by incorporating randomness into the base load portion of the supply stack function and equating it with a noisy demand process. We obtain closed form solutions for European option prices written on average spot prices considering two different supply models: a mean-reverting model and a Markov chain model. The results are extensions of the classic Black–Scholes equation. The model provides a relatively simple approach to describe the complicated price behaviour observed in electricity spot markets and also allows for computationally efficient derivatives pricing.
Description
Article deposited according to the policy found on the Elsevier website, , http://www.elsevier.com/wps/find/authorsview.authors/postingpolicy, June 28, 2012.
Keywords
Electricity pricing, Power derivatives
Citation
R.J. Elliott and M.R.Lyle, „A „Simple‟ Hybrid Model for Power Derivatives‟. Energy Economics 31 (2009) 757–767