Financial engineering models for electricity market : futures pricing, liquidity risks and investment

The dissertation addresses some important topics arising in restructured electricity markets. A first part is dedicated to the pricing of power contingent claims. Electricity is a derivative product, structurally related to other energy assets: it is mainly produced by fuel fired thermal power stations. For pricing power derivatives, we propose a hybrid model that accounts for these structural relationships and which can be understood as a combination of both the fundamentals of power generation and the classical stochastic framework. It is recognized that financial markets deviate to varying degrees from the perfect paradigm and in particular that electricity markets significantly remain less liquid than other commodity markets. We assess the effect of limited liquidity in power exchanges by using an equilibrium model where illiquid contracts prevent agents from hedging up to their desired level and study the implications of the introduction of such market frictions in the theory of derivatives pricing. In the second part of the thesis we elaborate on investment valuations in stochastic generation capacity expansion models. Designed originally as optimization problems for the regulated monopoly industry, those models can be interpreted as equilibrium models in a competitive environment. We specifically develop a procedure to accurately estimate the distribution of the margin profit in a standard stochastic program. We eventually focus on the risk averse problem using the good-deal risk measure, which can be seen as an extension of the stochastic discount factor constructed from standard corporate finance theories such as the CAPM and the APT.
(FSA 3) -- UCL, 2011