Valuation of energy storage: an optimal switching approach

Carmona, René; Ludkovski, Michael

doi:10.1080/14697680902946514

Cited by 149 publications

(120 citation statements)

References 27 publications

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“…See for example [30,3]. Moreover, some of these methods have been extended to value gas storage and we refer the interested reader to [28,27,50,77]. and the references therein.…”

Section: Introductionmentioning

confidence: 99%

A Survey of Commodity Markets and Structural Models for Electricity Prices

Carmona

Coulon

2013

Quantitative Energy Finance

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Abstract. The goal of this survey is to review the major idiosyncrasies of the commodity markets and the methods which have been proposed to handle them in spot and forward price models. We devote special attention to the most idiosyncratic of all: electricity markets. Following a discussion of traded instruments, market features, historical perspectives, recent developments and various modeling approaches, we focus on the important role of other energy prices and fundamental factors in setting the power price. In doing so, we present a detailed analysis of the structural approach for electricity, arguing for its merits over traditional reduced-form models. Building on several recent articles, we advocate a broad and flexible structural framework for spot prices, incorporating demand, capacity and fuel prices in several ways, while calculating closed-form forward prices throughout.

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“…See for example [30,3]. Moreover, some of these methods have been extended to value gas storage and we refer the interested reader to [28,27,50,77]. and the references therein.…”

Section: Introductionmentioning

confidence: 99%

A Survey of Commodity Markets and Structural Models for Electricity Prices

Carmona

Coulon

2013

Quantitative Energy Finance

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“…The investment value of the battery when used as reserve capacity is therefore equal to the value of an infinite sequence of such real options, which we call the 'lifetime valuation' (a somewhat related study may be found in Carmona and Ludkovski (2010), where the value of gas storage units used for price arbitrage is derived using a numerical approach). We show that the lifetime value is finite when the sum of the single contract payments (initial premium and reward) is strictly less than the imbalance price upon exercise.…”

Section: Resultsmentioning

confidence: 99%

Real option valuation for reserve capacity

Moriarty

Palczewski

2017

European Journal of Operational Research

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Motivated by the potential use of electricity storage to smooth fluctuations in supply and demand, we study the problem of writing American-type call options when the holder's exercise strategy is of threshold type (so that the time of exercise is known, but random). The writer must provide physical cover by buying and storing the asset before selling the option. We optimise the writer's strategy for a single option and for an infinite sequence of options, these two strategies being different. The latter is motivated by the lifetime valuation of an energy storage unit when used as reserve capacity in a power system. Our stochastic process is a Brownian motion representing the real-time system imbalance, and which we rescale to represent an imbalance price. The single option leads to an optimal stopping problem in which the principle of smooth fit may be violated and the stopping region may be disconnected. The lifetime analysis uses techniques and results for the single option to construct a certain fixed point characterising the value function.

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“…However, our approach is more general than the one of LMS. We also introduce new ADPs, adding to the literature on commodity storage valuation (e.g., Chen and Forsyth 2007, Boogert and De Jong 2008, Thompson et al 2009, Carmona and Ludkovski 2010, Secomandi 2010, Wu et al 2010, Birge 2011, Boogert and De Jong 2011, and Felix and Weber 2012. More broadly, our PSR approach potentially provides a solution methodology for other real option problems.…”

Section: Literature Reviewmentioning

confidence: 99%

Relaxations of Approximate Linear Programs for the Real Option Management of Commodity Storage

2015

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The real option management of commodity conversion assets gives rise to intractable Markov decision processes (MDPs). This is due primarily to the high dimensionality of a commodity forward curve, which is part of the MDP state when using high dimensional models of the evolution of this curve, as commonly done in practice. Focusing on commodity storage, we develop a novel approximate dynamic programming methodology that hinges on the relaxation of approximate linear programs (ALPs) obtained using value function approximations based on reducing the number of futures prices that are part of the MDP state. We derive equivalent approximate dynamic programs (ADPs) for a class of these ALPs, also subsuming a known ADP. We obtain two new ADPs, the value functions of which induce feasible policies for the original MDP, and lower and upper bounds, estimated via Monte Carlo simulation, on the value of an optimal policy of this MDP. We investigate the performance of our ADPs on existing natural gas instances and new crude oil instances. Our approach has potential relevance for the approximate solution of MDPs that arise in the real option management of other commodity conversion assets, as well as the valuation and management of real and financial options that depend on forward curve dynamics.

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Valuation of energy storage: an optimal switching approach

Cited by 149 publications

References 27 publications

A Survey of Commodity Markets and Structural Models for Electricity Prices

A Survey of Commodity Markets and Structural Models for Electricity Prices

Real option valuation for reserve capacity

Relaxations of Approximate Linear Programs for the Real Option Management of Commodity Storage

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