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SUMMARY:Simulating Electricity Prices: negative prices and auto-correlatio
 n - Adrien Grange-Cabane\, BP
DTSTART:20180206T130000Z
DTEND:20180206T140000Z
UID:TALK100750@talks.cam.ac.uk
CONTACT:Dr Vivien Gruar
DESCRIPTION:BP Supply & Trading has a significant power trading business i
 n North America and is seeking to build a similar commercial activity in c
 ontinental Europe. Much of this new business will be customer focussed\, w
 ith a strong emphasis on providing tailored commercial solutions to physic
 al market participants\, ranging from vanilla instruments to more complex 
 structures\, for example spark-spread\noptions\, swing contracts and virtu
 al power plants. The generally non-storable nature of electricity imposes 
 considerable valuation challenges from a derivatives pricing perspective. 
 For example\, the increase in renewables use lead to the apparition of neg
 ative spot prices. As the electricity production of renewable (wind or sol
 ar) is hard to predict\, the supply on the grid is exceeding the demand by
  a large amount. Consequently\, the settlement price of power becomes nega
 tive to incentivise non-renewable (e.g. gas or coal) generators to switch 
 off. Price models such as the log-normal Black-Scholes model do not consid
 er these stylised facts and need to be extended for commodity markets.\n\n
 Another feature of commodity markets is that the price dynamics of power i
 s heavily dependent on the dynamics of that of fuels used for its producti
 on\, especially gas. This dependence has recently been modelled in the con
 text of co-integration which assumes the existence of a long term stationa
 ry process that drives both the power and gas prices. In the short term\, 
 the power and gas prices can diverge but they ultimately converge to their
  long-term equilibrium.\n\nThis research project will explore recent model
 ling approach that have been put forward to model negative power prices an
 d/or the combined dynamics of power and gas. Both are very active research
  topic for BP Supply & Trading. First\, power derivatives will be signific
 antly affected by the presence of negative prices. Second\, traditional mo
 delling of the joint dynamics of power and gas through a correlation coeff
 icient leads to overestimating the value of a price generation assets. The
  use of co-integration is paramount to price correctly these.\n\nReference
 s\n# Benth\, Fred & Koekebakker\, Steen. (2015). Pricing of forwards and o
 ther Derivatives in cointegrated commodity markets. Energy Economics\n# En
 zo Fanone\, Andrea Gamba\, Marcel Prokopczuk\, The case of negative day-ah
 ead electricity prices\, Energy Economics\, Volume 35\, 2013\, Pages 22-34
 \n
LOCATION:MR3 Centre for Mathematical Sciences
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