Real options in the energy markets

Yizhi He

    Research output: ThesisPhD Thesis - Research UT, graduation UT

    947 Downloads (Pure)

    Abstract

    Electricity prices are notoriously hard to model due to their exotic behaviors. The extraordinarily high volatilities, strong mean reversion, pronounced cyclical price patterns, and occasional occurrence of price spikes may demand very complicated models. From the empirical analysis with the Dutch and German electricity market data, we find that the two-state regime switching models have a superior performance than a jump diffusion model in terms of replicating the higher moments in the historical data and forecasting electricity prices. The real options method has been used in the valuation of energy assets and the decision-makings in operation and investment in power plants. Our empirical simulation results show that power plant values can be decreased by volumetric risk factors from both the supply side and the demand side. Investment opportunities in power plants can be valued as American options. We value different types of investment options by using both the Hull and White trinomial tree and the Least Squares Monte Carlo method. We confirm the conclusion that the option value to invest in a peak-load power plant is higher than the option to invest in a base-load power plant when the spark spread is lower, and vice versa.
    Original languageEnglish
    Awarding Institution
    • University of Twente
    Supervisors/Advisors
    • Bagchi, A., Supervisor
    • Dupont, D., Co-Supervisor
    Award date5 Oct 2007
    Place of PublicationEnschede
    Publisher
    Print ISBNs978-90-365-2568-8
    Publication statusPublished - 5 Oct 2007

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