Abstract
This paper analyzes the valuation and pricing of physical electricity delivery contracts from the viewpoint of a producer with given capacities for production and fuel-storage. Using stochastic optimization problems in discrete time with general state space, the dual problems of production problems are used to derive no-arbitrage conditions for fuel and electricity prices as well as superhedging values and prices of bilaterally traded electricity delivery contracts. In particular we take the perspective of an electricity producer, who serves contractual deliveries but avoids unacceptable losses. The resulting no-arbitrage conditions, stochastic discount factors and superhedging prices account for typical frictions like limitation of storage and production capacity and for the fact that it is possible to produce electricity from fuel, but not to produce fuel from electricity. Similarities, but also substantial differences to purely financial results can be demonstrated in this way. Furthermore, using acceptability measures, we analyze capital requirements and acceptability prices for delivery contracts, when the producer accepts some risk.
Highlights
This work aims at the analysis of valuation and pricing for electricity delivery contracts, bilaterally traded between a producer and a consumer of delivered electrical energy
Proposition 2 shows that the shadow prices ξ related to the cash position, which occurs in Lemma 3, can be interpreted as a process of stochastic discount factors applied to the opportunity costs of delivering amounts Dt of electricity at price K instead of selling them at the market at prices Xte
In the present paper we analyzed basic differences regarding the characterization of arbitrage and the pricing of bilateral contracts between electricity markets and financial markets
Summary
This work aims at the analysis of valuation and pricing for electricity delivery contracts, bilaterally traded between a producer and a consumer of delivered electrical energy. On the one hand valuation and pricing of contracts is a typical problem from finance, and many authors apply classical financial results in a direct way to pricing and valuation of electricity contracts, see e.g. most chapters and cited literature in Eydeland and Wolyniec (2003). This is an important option for practical applications. In particular it turns out that—based on this dualization—similarities and distinctions between classical financial results and prices obtained from production problems can be analyzed in a convenient way
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