Pricing analysis of wind power derivatives for renewable energy risk management. (15th December 2021)

• Record Type: Journal Article
• Authors: Kanamura, Takashi; Homann, Lasse; Prokopczuk, Marcel
• Is Part Of: Applied energy. Volume 304(2021)
• Publication Date: 2021-12-15
• Subjects: G13 -- L94 -- Q42; Wind power -- Load factor -- Good-deal bounds -- Futures and options -- Mean reversion -- Seasonality; Power (Mechanics) -- Periodicals; Energy conservation -- Periodicals; Energy conversion -- Periodicals; 621.042
• DOI: 10.1016/j.apenergy.2021.117827
• Languages: English
• ISSNs: 0306-2619

Abstract

Abstract: The objective of this study is to analyse the theoretical pricing of wind power derivatives, which is important for renewable energy risk management but has a problem in the pricing due to the illiquidity of the assets and to show the application of the theory to the practical implementation of the pricing. We make three contributions to the literature. First, to the best of our knowledge, we are the first to conduct a detailed econometric analysis of the wind power futures underlying, i.e., the electricity production based on windmills, resulting in strong support of seasonality and mean reversion in the logit-transformed wind power load factors. Second, after proposing a new model of wind power load factors based on the econometric findings, we analyse the theoretical prices of wind power futures and call option contracts to which the good-deal bounds pricing within an illiquid market situation is applied as well as we show the application of the theory to the practical pricing with the illiquidity. Third, our empirical pricing analysis shows that theoretical wind power futures prices derived using seasonal modelling more accurately reflect reality than those derived without seasonality compared to market observations, resulting in the importance of seasonality modelling in theoretical wind power derivatives pricing. In particular, considering that the upper and lower price boundaries represent the selling and the buying prices in the incomplete market, respectively, we show that the pricing of the short position is more affected by the seasonality than the pricing of the long position. Finally, we illustrate and discuss the practical applications of the results obtained in our study. Highlights: The objective of this study is to analyse the pricing of wind power derivatives. Logit-transformed wind power load factors have seasonality and a mean reversion. We propose a new model of wind power load factors from the econometric findings. We analyse wind power derivative prices by using the good-deal bounds pricing. Wind power futures price model w/ seasonality reflects reality than that w/o.