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Featured Articles
Towards a European market of electricity: Spot and derivatives trading
- By Helyette Geman
- Published 02/19/2008
- Price modeling
- Unrated
Keywords: energy markets, electricity spikes, power optionsPublished in:
Publication year: 2002
Deregulation of electricity markets is spreading worldwide at a high speed : it has been completed for some years in Scandinavia and the United Kingdom, is well under way in the United States and being embraced in most continental Western Europe outside France. Germany and the Netherlands are quite deregulated, followed by Spain. Italy is establishing power trading in a competitive environment. This represents a multi-billion spot market that is developing very quickly. And the same pattern of evolution as in the financial markets is being observed, with the growth of a variety of derivative instruments such as forward and Futures contracts swaps, plain-vanilla and exotic options.
The main problem associated with the pricing of those derivatives is that the fundamental financial models were established for stocks and bonds and do not capture the unique features of electricity, in particular the non-storability (except for hydroelectricity), the seasonality and spikes of prices, the difficulties of transportation, (existence of high voltage lines, constraints at the hubs imposed by the Kirchoff laws), not to mention the necessity for the European Community to define clear rules for cross-border electricity transmission.
The goal of this paper is to discuss the main features of electricity spot prices and investigate the pricing issues attached to power options.
Recent Articles
Optimal Strategies for Investment in Generation of Electric Energy through Real Options
- By Julia Cristina Caminha Noronha
- Published 12/18/2008
- Asset optimization
- Unrated
Published in X SEPOPE - 2006: CAMINHA-NORONHA, J. C.;
MARANGON-LIMA, J. W.;
FERREIRA T. G. L.
The Brazilian electric sector has two market-environments for the energy supply: a regulated pool
(ACR), with 64 power distribution companies, and the free market (ACL), including free-consumers
and energy wholesalers. In the regulated market, the power generation competition is enforced via
energy auctions, where the winning generator has to sign long-term standard power purchase
agreements (PPA) simultaneously with all distributors at the bidding-price. In this work we use the
Real Options Theory to valuate new hydraulic generation assets, which will be traded in the new
energy auction. This approach models the uncertainties in setting up the cash flow for the investments
and incorporates some possible managerial flexibility associated with the decision taken along the
investment forecast. A real example is presented, in which we incorporated the flexibilities regarding
the waiting to invest in a new hydro power plant and an abandon option, representing the transfer of
concession rights. Since the project involves a multistage investment consisting of design, construction
and operation phases, it can be treated as a sequential compound option. A binomial approach was
elaborated to model this investment opportunity analysis.
