An improved basket of spread options heuristic for merchant energy storage. (3rd August 2018)

• Record Type: Journal Article
• Authors: Secomandi, Nicola
• Is Part Of: IISE transactions. Volume 50:Number 8(2018)
• Page Start: 645
• Page End: 653
• Publication Date: 2018-08-03
• Subjects: Basket of spread options heuristic -- linear programming -- Markov decision processes -- merchant energy storage -- natural gas -- real options; Industrial engineering -- Periodicals; Systems engineering -- Periodicals; Industrial engineering; Systems engineering; Electronic journals; Periodicals; 670.285
• DOI: 10.1080/24725854.2017.1336685
• Languages: English
• ISSNs: 2472-5854

Abstract

ABSTRACT: Practitioners use the Basket of Spread Options (BSO) heuristic to model merchant energy storage as a portfolio of spread options and spot/forward sales. This method solves a linear program to obtain the composition of this portfolio and its associated BSO policy. Sequential reoptimization of this model yields the Rolling BSO (RBSO) policy. Although this policy performs well, typically dominating the BSO policy and often being near optimal, it can struggle when storage is fast. To attempt to obtain an improved RBSO policy, especially for fast storage, this article proposes a BSO heuristic that modifies the objective function of the BSO linear program based on exchange option prices and a tunable parameter. On a set of known natural gas storage instances, limited optimization of this adjustable quantity leads to modestly improved RBSO policies on average but substantially so when the original RBSO policies perform poorly, which occurs on some fast storage instances. Moreover, fixing this parameter to 0.6 gives RBSO policies that virtually match the performance of the best considered RBSO policies. The proposed BSO heuristic is thus as easy to use in practice as the original BSO heuristic.