Valuation of electricity storage contracts using the COS method

Boris C. Boonstra; Cornelis W. Oosterlee

doi:10.1016/j.amc.2021.126416

Valuation of electricity storage contracts using the COS method

Boris C. Boonstra^*
, Cornelis W. Oosterlee

^*Corresponding author for this work

Centrum voor Wiskunde en Informatica

Research output: Contribution to journal › Article › Academic › peer-review

Abstract

Storage of electricity has become increasingly important, due to the gradual replacement of fossil fuels by more variable and uncertain renewable energy sources. In this paper, we provide details on how to mathematically formalize a corresponding electricity storage contract, taking into account the physical limitations of a storage facility and the operational constraints of the electricity grid. We give details of a valuation technique to price these contracts, where the electricity prices follow a structural model based on a stochastic polynomial process. In particular, we show that the Fourier-based COS method can be used to price the contracts accurately and efficiently.

Original language	English
Article number	126416
Number of pages	23
Journal	Applied Mathematics and Computation
Volume	410
DOIs	https://doi.org/10.1016/j.amc.2021.126416
Publication status	Published - 1 Dec 2021

Bibliographical note

Publisher Copyright:
© 2021 The Authors

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 7 Affordable and Clean Energy

Keywords

COS method
Electricity prices
Electricity storage
Fourier-cosine expansions
Polynomial processes
Valuation

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10.1016/j.amc.2021.126416Licence: CC BY

1-s2.0-S0096300321005051-mainFinal published version, 3.21 MBLicence: CC BY

Cite this

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AU - Oosterlee, Cornelis W.

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N2 - Storage of electricity has become increasingly important, due to the gradual replacement of fossil fuels by more variable and uncertain renewable energy sources. In this paper, we provide details on how to mathematically formalize a corresponding electricity storage contract, taking into account the physical limitations of a storage facility and the operational constraints of the electricity grid. We give details of a valuation technique to price these contracts, where the electricity prices follow a structural model based on a stochastic polynomial process. In particular, we show that the Fourier-based COS method can be used to price the contracts accurately and efficiently.

AB - Storage of electricity has become increasingly important, due to the gradual replacement of fossil fuels by more variable and uncertain renewable energy sources. In this paper, we provide details on how to mathematically formalize a corresponding electricity storage contract, taking into account the physical limitations of a storage facility and the operational constraints of the electricity grid. We give details of a valuation technique to price these contracts, where the electricity prices follow a structural model based on a stochastic polynomial process. In particular, we show that the Fourier-based COS method can be used to price the contracts accurately and efficiently.

KW - COS method

KW - Electricity prices

KW - Electricity storage

KW - Fourier-cosine expansions

KW - Polynomial processes

KW - Valuation

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JO - Applied Mathematics and Computation

JF - Applied Mathematics and Computation

M1 - 126416

ER -

Valuation of electricity storage contracts using the COS method

Abstract

Bibliographical note

UN SDGs

Keywords

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