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A REAL OPTIONS APPROACH FOR PRICING ELECTRICITY TOLLING AGREEMENTS

SHI-JIE DENG

School of Industrial & Systems Engineering, Georgia Institute of Technology, 765 Ferst Drive, Atlanta, GA 30332, USA

Corresponding author.

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and

ZHENDONG XIA

BP Energy Company, Houston, TX, USA

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https://doi.org/10.1142/S0219622006002039Cited by:24 (Source: Crossref)

Abstract

An electricity tolling agreement (or, tolling contact) is a supply contract in which the buyer reserves the right to take the output of an underlying electricity generation asset by paying a predetermined premium to the asset owner. We propose a real options approach to value a tolling contract incorporating operational characteristics of the generation asset and contractual constraints. Dynamic programming and value function approximation by Monte Carlo based least-squares regression are employed to solve the valuation problem. The effects of different electricity price assumptions on the valuation of tolling contracts are examined through numerical examples.

Keywords:

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