http://www.erasmusenergy.com en-us N/A dejong@kyos.com Sun, 05 Feb 2012 15:02:53 CET 20 http://www.erasmusenergy.com/articles/63/1/The-price-of-power-The-Valuation-of-Power-and-Weather-Derivatives/Page1.html Published in:
Publication year: 2000
Co-author 1: Martin Jermakyan

Pricing contingent claims on power presents numerous challenges due to (1) the nonlinearity of power price processes, and (2) time dependent variations in prices. We propose and implement an equilibrium model in which the spot price of power is a function oftwo state variables: demand (load or temperature) and fuel price. In this model, any power derivative price must satisfy a PDE with boundary conditions that reflect capacity limits and the non-linear relation between load and the spot price of power. Moreover, since power is non-storable and demand is not a traded asset, the power derivative price embeds a market price of risk. Using inverse problem techniques and power forward prices from the PJM market, we solve for this market price of risk function. During 2000, the market price of risk represented as much as 50 percent of PJM powerforwardpricesfordelivery during summer months. This is plausibly due to the extreme right skewness of power prices;this induces left skewness in the payoff to short forward positions, and a large risk premium is required to induce traders to sell power forwards. This huge risk premium suggests that the power market is not fully integrated with the broader financial markets. The data also suggest that power forward prices overreact to current demand shocks.]]> no@spam.com (Craig Pirrong) Mon, 01 Oct 2007 13:28:29 CEST http://www.erasmusenergy.com/articles/63/1/The-price-of-power-The-Valuation-of-Power-and-Weather-Derivatives/Page1.html