Valuation of Structured Retail Electricity Contracts With Market Models

Journal of Energy Markets, Forthcoming

18 Pages Posted: 4 Nov 2009 Last revised: 17 Aug 2011

Date Written: October 4, 2009

Abstract

It is the goal of this work to show, how financial models can be used to price certain contracts in the electricity market in analogy to interest rate products. Such contracts are delivery contracts with retail or institutional customers. In fact, many features of electricity products exist almost identically in structured Libor products and some models have already been adapted to the world of commodities. Yet, we are the first to show, how they can be applied to value such structures in the retail market. Though the market under consideration is far from being driven by rational participants only, we show how to quantify features such as call rights for customers, hedge analysis for utilities and monetarize laziness, i.e. irrational behaviour of customers merely based on public information.

Keywords: Electricity Markets, Analysis of Electricity Contracts, Option Premia, Longstaff-Schwartz Algorithm, Multicallable Products

JEL Classification: C6, C8, G1

Suggested Citation

Metka, Kevin and Boerger, Reik H., Valuation of Structured Retail Electricity Contracts With Market Models (October 4, 2009). Journal of Energy Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1499673

Kevin Metka (Contact Author)

Ulm University ( email )

Albert-Einstein-Alee 11
Ulm, D-89081
Germany

Reik H. Boerger

RWE AG ( email )

Essen, DE
Germany

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