Application of Exotic Real Option for Electricity Market: Trial for Supply Function Bids Case

Author

Liu, Kai ; Hou, Yunhe ; Wu, Felix F. ; Ni, Yixin

Author_Institution

Dept. of Electr. & Electron. Eng., Hong Kong Univ., Kowloon

fYear

2007

fDate

24-28 June 2007

Firstpage

1

Lastpage

7

Abstract

Real option theory has been widely applied for electricity asset valuation and investment issues. Since the supply function is the considerable bidding form of electricity market. Here we present a new exotic electricity real option tool in case of supply function bids for nowadays electricity market. Two typical electricity market bids forms- continuous and block bids curve- yielding the different nonlinear payoff function from that of standard Black Scholes formula are studied. The analytical formulas for this electricity option based on the classical Geometric Brownian motion and Mean reverting price process are explicitly derived. The test results by Monte Carlo simulation illustrate our formulas are correct. Our model and formula offer an important supplement for application of real option theory for electricity market.

Keywords

Brownian motion; Monte Carlo methods; commerce; power markets; pricing; Monte Carlo simulation; block bid; classical geometric Brownian motion; continuous bid; electricity market; exotic electricity; exotic real option; mean reverting price process; supply function bids case; Consumer electronics; Costs; Electricity supply industry; Energy consumption; Investments; Power generation; Power markets; Pricing; Stochastic processes; Testing; Black Scholes formula; electricity market; real option; supply function;

fLanguage

English

Publisher

ieee

Conference_Titel

Power Engineering Society General Meeting, 2007. IEEE

Conference_Location

Tampa, FL

ISSN

1932-5517

Print_ISBN

1-4244-1296-X

Electronic_ISBN

1932-5517

Type

conf

DOI

10.1109/PES.2007.385934

Filename

4275700