Pricing electricity derivatives on an hourly basis
Branger Nicole, Reichmann Oleg, Wobben Magnus
Abstract
The purpose of this paper is to develop a framework for pricing electricity derivatives on an hourly basis. We do not - in contrast to most current approaches - focus exclusively on spot models which primarily reflect empirical spot price dynamics, but also ensure a straightforward applicability to the valuation of electricity derivatives. We show that a model with a jump and a spike component can be calibrated to both the time-series of hourly spot prices and the cross-section of futures prices, once we allow for time-dependent jump and spike parameters. Furthermore, we illustrate the importance of derivative pricing in electricity markets and present some examples of options on futures and hourly spot-options, such as operating reserves and physical transmission rights.
Keywords
electricity derivatives; hourly risk premiums; option pricing; operating reserve; physical transmission rights