Valuation of physical transmission rights—An analysis of electricity cross-border capacities between Germany and the Netherlands

The purpose of this paper is to discuss market-coherent valuation of physical transmission rights for cross-border capacities between Germany and the Netherlands. Aiming at a fair valuation of these contracts, the most important stylized facts of electricity prices such as mean reversion, spikes and...

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Bibliographic Details
Published in:Energy policy 2012-03, Vol.42, p.174-180
Main Authors: Wobben, Magnus, Dieckmann, Birgit, Reichmann, Oleg
Format: Article
Language:English
Subjects:
Applied sciences
Border areas
Correlation
Cross border transactions
Cross-border capacities
Economic data
Electric energy
Electric power
Electric rates
Electricity
electricity costs
Electricity distribution
Energy
Energy economics
Energy market
Energy policy
Energy prices
Exact sciences and technology
General, economic and professional studies
Germany
market prices
Modelling
Netherlands
Physical transmission rights
Prices
quantitative analysis
Regional analysis
Spread options
Studies
Transmission mechanism
Valuation
Western Europe
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Summary:The purpose of this paper is to discuss market-coherent valuation of physical transmission rights for cross-border capacities between Germany and the Netherlands. Aiming at a fair valuation of these contracts, the most important stylized facts of electricity prices such as mean reversion, spikes and correlations of regional prices have to be considered. We present different approaches to the valuation of physical transmission rights and perform a quantitative analysis of the results. On the one hand various challenges of modeling regional price spreads are analyzed. On the other hand we indicate a structural undervaluation of physical transmission rights in all model constellations, i.e. market prices are below theoretical prices of PTR's flexibility. We discuss several reasons for this undervaluation and finally state that regulatory modifications have to be made to avoid missing incentives for the extension of cross-border capacities. ► Modeling transmission rights as option contracts. ► Analysis of regional price spreads. ► Indication of a structural undervaluation of physical transmission rights.
ISSN:0301-4215
1873-6777
DOI:10.1016/j.enpol.2011.11.063