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A Survey of Commodity Markets and Structural Models for Electricity Prices

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Quantitative Energy Finance

Abstract

The goal of this survey is to review the major idiosyncrasies of the commodity markets and the methods which have been proposed to handle them in spot and forward price models. We devote special attention to the most idiosyncratic of all: electricity markets. Following a discussion of traded instruments, market features, historical perspectives, recent developments and various modelling approaches, we focus on the important role of other energy prices and fundamental factors in setting the power price. In doing so, we present a detailed analysis of the structural approach for electricity, arguing for its merits over traditional reduced-form models. Building on several recent articles, we advocate a broad and flexible structural framework for spot prices, incorporating demand, capacity and fuel prices in several ways, while calculating closed-form forward prices throughout.

As of July 2013, the second author is now at the University of Sussex, UK.

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Authors and Affiliations

  1. Department of ORFE, Bendheim Center for Finance, Princeton University, Princeton, NJ, 08544, USA

    René Carmona & Michael Coulon

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  1. René Carmona
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  2. Michael Coulon
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Correspondence to Michael Coulon .

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  1. Center of Mathematics for Applications, University of Oslo, Oslo, Norway

    Fred Espen Benth

  2. Verbund Trading AG, Vienna, Austria

    Valery A. Kholodnyi

  3. Dipartimento di Matematica, University di Roma, La Sapienza, Rome, Italy

    Peter Laurence

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Carmona, R., Coulon, M. (2014). A Survey of Commodity Markets and Structural Models for Electricity Prices. In: Benth, F., Kholodnyi, V., Laurence, P. (eds) Quantitative Energy Finance. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-7248-3_2

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