Pricing electricity derivatives on an hourly basis

Nicole Branger, Oleg Reichmann, Magnus Wobben

Abstract

ABSTRACT

The purpose of this paper is to develop a framework for pricing electricity derivatives on an hourly basis.We do not, in contrast to most current approaches, focus exclusively on spot models which primarily reflect empirical spot price dynamics. This ensures a straightforward applicability to the valuation of electricity derivatives. We show that a model with a jump and a spike component can be calibrated to both the time series of hourly spot prices and the cross section of futures prices, once we have allowed for time-dependent jump and spike parameters. Furthermore, we illustrate the importance of option pricing in electricity markets and present some examples of options on futures and hourly spot options, such as operating reserves and physical transmission rights.