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Representing the Valuation of Take-or-Pay Provisions in Gas Markets With Limited Liquidity.
- Source :
- IEEE Transactions on Power Systems; Jul2016, Vol. 31 Issue 4, p3152-3159, 8p
- Publication Year :
- 2016
-
Abstract
- Long-term contracting is the traditional governance mechanism to deal with the transaction costs associated with the specificity of gas industry assets. Long-term contracts have been often used to allocate risks among players, and to that end, they often include take-or-pay provisions. These clauses specify that buyers take the volume risk, as they are obliged to pay for a minimum amount of gas consumption. In exchange, buyers pay a predefined price, supposedly lower than the risk-neutral expectation of short-term gas prices. In that view, if the buyer is able to resell that gas in the short term, the contract is an effective hedge against short-term volatility. Otherwise, the contract does not act as a hedge but it becomes a sunk cost. The corresponding power producers' behavior involves not only output decisions but also financial decisions. To analyze that situation, this paper develops a new quantitative methodology that allows comparing risk-neutral valuations of gas and power markets decisions. We test the model in a real-size system, and show the additional cost of the power system associated with a possible illiquidity of the short-term gas market. [ABSTRACT FROM PUBLISHER]
Details
- Language :
- English
- ISSN :
- 08858950
- Volume :
- 31
- Issue :
- 4
- Database :
- Complementary Index
- Journal :
- IEEE Transactions on Power Systems
- Publication Type :
- Academic Journal
- Accession number :
- 115245744
- Full Text :
- https://doi.org/10.1109/TPWRS.2015.2481417