Mats Ehnbom och Karin Ramberg present their master's thesis

An approach to price VPP contracts

Abstract

Since the deregulation of the electricity market in the middle of the
1990's the trading with energy contracts has increased. Different
variations of VPP (Virtual Power Plant) options are relatively new to
the market and often difficult to price. A VPP is a contract that
allows its holder to sell electricity as if they owned a power
plant. We will define a hypothetical, general VPP contract and try to
price it with Monte Carlo simulation.  To do this we need a good joint
model for the electricity spot price and the spot prices for the
fuels. A large part of this Master Thesis is to develop a model with a
mutual trend for the generating fuels, oil, coal and natural gas to
capture long term dependence. Another large part is to explore
existing electricity spot price models and implement one of them at
the German market EEX.  When we have satisfying models we use Monte
Carlo simulation to price our defined VPP option and compare to the
historical outcome. The result seems promising and our conclusion is
that a contract like this could be traded.