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

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dc.contributor.author Cartea, Álvaro
dc.contributor.author González-Pedraz, Carlos
dc.contributor.editor Universidad Carlos III de Madrid. Departamento de Economía de la Empresa
dc.date.accessioned 2010-07-14T11:39:47Z
dc.date.available 2010-07-14T11:39:47Z
dc.date.issued 2010-07
dc.identifier.uri http://hdl.handle.net/10016/9075
dc.description.abstract An 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.mimetype application/pdf
dc.language.iso eng
dc.relation.ispartofseries UC3M Working papers. Business Economics
dc.relation.ispartofseries 10-06
dc.rights Atribución-NoComercial-SinDerivadas 3.0 España
dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.subject.other Real options
dc.subject.other Bull Call Spread
dc.subject.other Interconnector
dc.subject.other Electricity prices
dc.subject.other Jumps
dc.subject.other Jump filter
dc.title How much should we pay for interconnecting electricity markets? A real options approach
dc.type workingPaper
dc.subject.jel G13
dc.subject.jel Q41
dc.subject.eciencia Empresa
dc.rights.accessRights openAccess
dc.identifier.repec wb103206
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