The current continent-wide deregulation of the electrical power marketplace brings with it the challenge of valuing options to trade spot electrical power. In order to do this, a stochastic model for spot electricity prices and a means for accounting for risk in the discounting of cash flows are required. Once those are in hand, realistic electrical power options may be priced. In this talk I present some approaches taken by our group to these problems. The bulk of our effort so far has been in the construction of stochastic electricity price models.
Electrical power is a unique commodity.
Electrical power markets have only been deregulated in recent years, so price time series are relatively short. Furthermore, every regional market has its own special characteristics, making calibration of models across regions dangerous. Our models are more dependent on engineering lore and load data than they are on historical price data. We have constructed two classes of model. The second, continuous-time model, simulates spikes without resorting to Poisson jumps.