Valuation of electricity swing options by multistage stochastic programming

Authors:
Gido Haarbrücker;Daniel Kuhn
Affiliations:
Institute for Operations Research and Computational Finance (ior/cf-HSG), University of St.Gallen, Switzerland;Department of Computing, Imperial College London, United Kingdom
Venue:
Automatica (Journal of IFAC)
Year:
2009

Citing 5
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Abstract

Electricity swing options are Bermudan-style path-dependent derivatives on electrical energy. We consider an electricity market driven by several exogenous risk factors and formulate the pricing problem for a class of swing option contracts with energy and power limits as well as ramping constraints. Efficient numerical solution of the arising multistage stochastic program requires aggregation of decision stages, discretization of the probability space, and reparameterization of the decision space. We report on numerical results and discuss analytically tractable limiting cases.