Going solar: renewing Australia’s electricity options

Recent debates around electricity prices and renewable energy policy have ignored the crucial factors of rapidly dropping solar technology costs, and the critical risks involved in continuing with \u27business as usual\u27. Going solar is the first economic assessment of future electricity price shocks if fossil fuels continue to dominate. The report takes a close look at Australia’s electricity price security and singles out rising gas prices and more frequent droughts as key risks. Prices for gas-fired electricity are now linked to volatile international fuel prices. Water scarcity reduces supply from water-cooled coal plants, pushing up wholesale electricity prices. Without stable policies to support renewable energy, we risk future bill shocks of up to $250 a year for the average household, plus supply interruptions. Embracing the shift to renewable energy – a line powerfully supported by trends in the USA and China – can reduce vulnerability to electricity price shocks and energy insecurity. Rising popularity and rapidly falling costs put rooftop solar at the leading edge of this change, threatening traditional electricity business models

Market price of risk implied by Asian-style electricity options

In this paper we propose a jump diffusion type model which recovers the main characteristics of electricity spot price dynamics, including seasonality, mean reversion, and spiky behavior. Calibration of the market price of risk allows for pricing of Asian-type options written on the spot electricity price traded at Nord Pool. The usefulness of the approach is confirmed by out-of-sample tests.Power market, Electricity price modeling, Asian option, Market price of risk, Derivatives pricing

Simple approximations for option pricing under mean reversion and stochastic volatility

This paper provides simple approximations for evaluating option prices and implied volatilities under stochastic volatility. Simple recursive formulae are derived that can easily be implemented in spreadsheets. The traditional random walk assumption, dominating in the analysis of financial markets, is compared with mean reversion which is often more relevant in commodity markets. Deterministic components in the mean and volatility are taken into consideration to allow for seasonality, another frequent aspect of commodity markets. The stochastic volatility is suitably modelled by GARCH. An application to electricity options shows that the choice between a random walk and a mean reversion model can have strong effects for predictions of implied volatilities even if the two models are statistically close to each other.seasonality;stochastic volatility;derivatives;mean reversion;energy markets;spreadsheets

Sustainability of UK shale gas in comparison with other electricity options: Current situation and future scenarios.

Many countries are considering exploitation of shale gas but its overall sustainability is currently unclear. Previous studies focused mainly on environmental aspects of shale gas, largely in the US, with scant information on socio-economic aspects. To address this knowledge gap, this paper integrates for the first time environmental, economic and social aspects of shale gas to evaluate its overall sustainability. The focus is on the UK which is on the cusp of developing a shale gas industry. Shale gas is compared to other electricity options for the current situation and future scenarios up to the year 2030 to investigate whether it can contribute towards a more sustainable electricity mix in the UK. The results obtained through multi-criteria decision analysis suggest that, when equal importance is assumed for each of the three sustainability aspects shale gas ranks seventh out of nine electricity options, with wind and solar PV being the best and coal the worst options. However, it outranks biomass and hydropower. Changing the importance of the sustainability aspects widely, the ranking of shale gas ranges between fourth and eighth. For shale gas to become the most sustainable option of those assessed, large improvements would be needed, including a 329-fold reduction in environmental impacts and 16 times higher employment, along with simultaneous large changes (up to 10,000 times) in the importance assigned to each criterion. Similar changes would be needed if it were to be comparable to conventional or liquefied natural gas, biomass, nuclear or hydropower. The results also suggest that a future electricity mix (2030) would be more sustainable with a lower rather than a higher share of shale gas. These results serve to inform UK policy makers, industry and non-governmental organisations. They will also be of interest to other countries considering exploitation of shale gas

Simple approximations for option pricing under mean reversion and stochastic volatility

This paper provides simple approximations for evaluating option prices and implied volatilities under stochastic volatility. Simple recursive formulae are derived that can easily be implemented in spreadsheets. The traditional random walk assumption, dominating in the analysis of financial markets, is compared with mean reversion which is often more relevant in commodity markets. Deterministic components in the mean and volatility are taken into consideration to allow for seasonality, another frequent aspect of commodity markets. The stochastic volatility is suitably modelled by GARCH. An application to electricity options shows that the choice between a random walk and a mean reversion model can have strong effects for predictions of implied volatilities even if the two models are statistically close to each other

Public preference of electricity options before and after Fukushima

The accident at the Fukushima nuclear power plant in spring 2011 spurred Germany and Switzerland to phase out nuclear technology. To ensure future electricity supply, this phase-out requires a strong commitment to accept alternative production technologies and energy strategies. This study examined if and how laypeople’s preference for electricity produced by nuclear power and the alternatives in Switzerland has been affected by the Japanese disaster. An online study was conducted in February (N = 69) and repeated in June 2011 (N = 57), applying the same questionnaire to both samples. The study included a preference rating task involving nuclear, gas, photovoltaics, wind power, and hydropower, and choice-based conjoint tasks. The conjoint tasks contained attributes such as production technologies and price instruments. Participants had to choose their preferred combination of attributes. The results show that laypeople’s preference for nuclear power dropped significantly between February and June 2011, whereas their preferences for other technologies changed only marginally. Furthermore, the envisaged mid-term “stepping stones” of gas and electricity imports on the way to renewable energy have been highly unpopular and have remained so after the Fukushima accident. Transitioning from nuclear energy to renewable energy, therefore, will likely be challenging

Energy price risk management

The price of electricity is far more volatile than that of other commodities normally noted for extreme volatility. Demand and supply are balanced on a knife-edge because electric power cannot be economically stored, end user demand is largely weather dependent, and the reliability of the grid is paramount. The possibility of extreme price movements increases the risk of trading in electricity markets. However, a number of standard financial tools cannot be readily applied to pricing and hedging electricity derivatives. In this paper we present arguments why this is the case