A 'simple' hybrid model for power derivatives

Matthew R. Lyle*, Robert J. Elliott

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

18 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)757-767
Number of pages11
JournalEnergy Economics
Volume31
Issue number5
DOIs
StatePublished - Sep 1 2009

Keywords

  • Electricity pricing
  • Power derivatives
  • Seasonality

ASJC Scopus subject areas

  • Economics and Econometrics
  • Energy(all)

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