RT Generic
T1 How much should we pay for interconnecting electricity markets? A real options approach
A1 Cartea, Álvaro
A1 González-Pedraz, Carlos
A2 Universidad Carlos III de Madrid. Departamento de Economía de la Empresa, 
AB An interconnector is an asset that gives the owner the option to transmit electricity between twolocations. In financial terms, the value of an interconnector is the same as a strip of real optionswritten 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 expressthe value of these real options in closed-form. We apply our valuation tool to five pairs ofEuropean neighboring markets to value a hypothetical one-year lease of the interconnector. Weshow valuations for different assumptions about the seasonal component of the spread, anddifferent liquidity caps which proxy for the depth of the interconnected power markets. Wederive no-arbitrage lower bounds for the value of the interconnector in terms of electricityfutures contracts. We find that, depending on the depth of the market, the jumps in the spreadcan account for between 1% and 40% of the total value of the interconnector. The two marketswhere an interconnector would be most (resp. least) valuable are Germany and the Netherlands(resp. France and Germany).
YR 2010
FD 2010-07
LK https://hdl.handle.net/10016/9075
UL https://hdl.handle.net/10016/9075
LA eng
DS e-Archivo
RD 1 sept. 2024