Electricity Options and Additional Information

Abstract

Electricity markets feature a non-storable underlying, which implies the break down of traditional cash-and-carry arguments as well as the well-known spot-forward relationship. We introduce the notion of information premium to describe the influence of future information - such as planned power plant maintenance - on the relationship between forward contracts and the spot market. In a recent paper we designed a statistical test to show the existence of the premia. Here, we examine how the presence of an information premium alters the prices of options on forwards. Also, we apply the technique of enlargement of filtrations to show how to calculate the premium specifically for certain types of information and delivery periods. Furthermore, we illustrate the results in various stylised examples.

Keywords: Information premium, Electricity markets, Forwards, Options, Enlargement of Filtrations

JEL Classification: C19, G13, G14, Q40