Electricity derivative markets : investment valuation, production planning and hedging

Abstract

This thesis studies electricity derivative markets from a view point of an electricity producer. The traditionally used asset pricing methods, based on the no arbitrage principle, are extended to take into account electricity specific features: the non storability of electricity and the variability in the load process. The sources of uncertainty include electricity forward curve, prices of resources used to generate electricity, and the size of the future production. Also the effects of competitors' actions are considered. The thesis illustrates how the information in the derivative prices can be used in investment and production planning. In addition, the use of derivatives as a tool to stabilize electricity dependent cash flows is considered. The results indicate that the information about future electricity prices and their uncertainty, obtained from derivative markets, is important in investment analysis and production planning.