Traditional net present value (NPV) analysis disregards the flexibility to adjust production decisions to market developments, and thus underestimate true plant value. On the other hand, methods treating power plants as a series of spread options ignore technical and contractual restrictions, and thus overestimate true plant value. In this article we demonstrate the use of cointegration to incorporate market fundamentals and calculate dynamic, yet reasonable, spread levels and power plant values.
World Power: uncertainties in wind production often priced at too low levels
This article describes the pricing and hedging of wind power contracts. It demonstrates that substantial discounts relative to baseload power prices are reasonable to cover the negative wind-price correlation and to cover the difficulty of hedging price risks.
Commodities Now: Negative prices in electricity markets
Commodities Now Publication about negative power prices by Cyriel de Jong (2003). Negative prices in electricity markets logo In this paper we describe how liberalisation has lead to the segmentation of trading opportunities for electricity with different periods to delivery. We clarify the price characteristics in each segment, including the extreme volatility in short-term prices and the phenomenon… Read more »
Energy Power Risk Management Journal: to Store or not to Store?
This article by Cyriel de Jong and Kasper Walet describes the optimal operation and valuation of natural gas storage based on a real option methodology.
Energy Power Risk Management: Gas hubs jockey for position
According to a survey of European natural gas experts, the Bunde-Oude gas hub is the most likely candidate to become the Henry Hub of Europe.
Energy Power Risk Management: Option pricing for power prices with spikes
Cyriel de Jong and Ronald Huisman have written the following article about the topic of Option Pricing. It appeared first in 2003 in the Journal of Energy Power Risk Management. The authors examine the impact of spikes on option prices. They compare prices from a standard mean-reverting model to a regime model that disentangles the spike process from the mean-reverting… Read more »