Groupe d’études et de recherche en analyse des décisions

Pricing Financial Derivatives in Electricity Markets

Martina Wilhelm ETH Zurich, Suisse

Part 1: Pricing power derivatives using fixed income market techniques

The focus of this presentation is the valuation of European type derivatives written on electrical spot and futures prices. The pricing methodology for power options is not trivial and still under discussion due to the physical attributes of the underlying. We pursue an axiomatic approach where a minimal set of reasonable assumptions provides a connection to interest rate theory. Popular options like caps, floors, and spreads are consistently priced by the proposed model applying the change–of–numeraire technique.

Part 2: Finite element valuation of swing options

Swing type derivatives enjoy an increasing popularity in electricity markets since they offer the desired flexibility in delivery with respect to timing and amount of energy. We derive an algorithm based on finite element methods to approximate swing option prices as well as exercise and continuation regions. The obtained numerical results are highly accurate allowing to analyze the influence of spot price models on option prices. The strengths of the proposed finite element procedure are demonstrated by a comparison with Monte Carlo methods.