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How much should we pay for interconnecting electricity markets? A real options approach

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dc.affiliation.dptoUC3M. Departamento de Economía de la Empresaes
dc.contributor.authorCartea, Álvaro
dc.contributor.authorGonzález-Pedraz, Carlos
dc.contributor.editorUniversidad Carlos III de Madrid. Departamento de Economía de la Empresa
dc.date.accessioned2010-07-14T11:39:47Z
dc.date.available2010-07-14T11:39:47Z
dc.date.issued2010-07
dc.description.abstractAn interconnector is an asset that gives the owner the option to transmit electricity between two locations. In financial terms, the value of an interconnector is the same as a strip of real options written on the spread between power prices in two markets. We model the spread based on a: seasonal trend, mean-reverting Gaussian process, and mean-reverting jump process. We express the value of these real options in closed-form. We apply our valuation tool to five pairs of European neighboring markets to value a hypothetical one-year lease of the interconnector. We show valuations for different assumptions about the seasonal component of the spread, and different liquidity caps which proxy for the depth of the interconnected power markets. We derive no-arbitrage lower bounds for the value of the interconnector in terms of electricity futures contracts. We find that, depending on the depth of the market, the jumps in the spread can account for between 1% and 40% of the total value of the interconnector. The two markets where an interconnector would be most (resp. least) valuable are Germany and the Netherlands (resp. France and Germany).
dc.format.mimetypeapplication/pdf
dc.identifier.repecwb103206
dc.identifier.urihttps://hdl.handle.net/10016/9075
dc.language.isoeng
dc.relation.ispartofseriesUC3M Working papers. Business Economics
dc.relation.ispartofseries10-06
dc.rightsAtribución-NoComercial-SinDerivadas 3.0 España
dc.rights.accessRightsopen access
dc.rights.urihttp://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.subject.ecienciaEmpresa
dc.subject.jelG13
dc.subject.jelQ41
dc.subject.otherReal options
dc.subject.otherBull Call Spread
dc.subject.otherInterconnector
dc.subject.otherElectricity prices
dc.subject.otherJumps
dc.subject.otherJump filter
dc.titleHow much should we pay for interconnecting electricity markets? A real options approach
dc.typeworking paper*
dspace.entity.typePublication
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