Journal
INTERNATIONAL JOURNAL OF INFORMATION TECHNOLOGY & DECISION MAKING
Volume 5, Issue 3, Pages 421-436Publisher
WORLD SCIENTIFIC PUBL CO PTE LTD
DOI: 10.1142/S0219622006002039
Keywords
electricity options pricing; tolling agreement; spark spread; real options; risk management; Monte Carlo simulation
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An electricity tolling agreement (or, tolling contact) is a supply contract in which the buyer reserves the right to take the output of an underlying electricity generation asset by paying a predetermined premium to the asset owner. We propose a real options approach to value a tolling contract incorporating operational characteristics of the generation asset and contractual constraints. Dynamic programming and value function approximation by Monte Carlo based least-squares regression are employed to solve the valuation problem. The effects of different electricity price assumptions on the valuation of tolling contracts are examined through numerical examples.
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