Hedging Strategy and Electricity Contract Engineering - IFOR
Hedging Strategy and Electricity Contract Engineering - IFOR
Hedging Strategy and Electricity Contract Engineering - IFOR
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
duction cost<br />
Marginal pro<br />
Y<br />
^<br />
^<br />
[<br />
D 2G<br />
\<br />
40 The electricity market<br />
D<br />
2<br />
[<br />
1] D<br />
Total production<br />
Z<br />
Fig. 2.16: Schematic supply stack with 2 potential dem<strong>and</strong> curves.<br />
extra dem<strong>and</strong>, i. e. when the supply stack is vertical, prices can be driven exceptionally<br />
high with no real connection to the marginal cost. Because of the<br />
typical shape of the supply stack which is non-decreasing <strong>and</strong>, except for the<br />
distortions when a new technology is brought online, convex in dem<strong>and</strong>, we<br />
can conclude that the price derivative with respect to dem<strong>and</strong> is increasing in<br />
dem<strong>and</strong><br />
D 1V SS<br />
^<br />
D<br />
D 2V SS<br />
^<br />
D<br />
D 1<br />
which is illustrated in Figure 2.16.<br />
The lumpiness of the supply stack with jumps in the marginal costs as more<br />
expensive technology is dispatched, creates a need for a spot price modeling,<br />
which is not continuous, since the discontinuities in marginal cost are directly<br />
translated into spikes in the price. The SDEs presented so far does not capture<br />
this feature, since they all result in continuous price processes.<br />
In the literature this phenomena is usually accounted by adding a jump component<br />
to a process driven only by a Brownian motion, such as (2.3). Johnson<br />
<strong>and</strong> Barz [JB98] propose the following model
Change language