Maria Flora (University of Verona) on "Optimal cross-border electricity trading" (with A.Cartea, G.Slavov, T.Vargiolu) - Brown Bag Seminar

Speaker:  Maria Flora - University of Verona
  Tuesday, February 5, 2019 at 12:00 PM Polo Santa Marta, Via Cantarane 24, Sala Vaona
We show that electricity flows between interconnected locations have a direct and indirect effect on electricity prices in the different locations. The direct effect refers to how prices between two locations are affected when power is flowing between these two locations only. The indirect effect refers to how the flows between two locations affect the price of power in other locations that are part of the interconnected electricity network. Based on this result we propose a model of the joint dynamics of electricity prices where flows of electricity affect, directly and indirectly, prices in all locations, and model a common co-integration factor of prices. We solve the optimal control problem of an agent who uses the interconnector to take positions in a subset of locations that are part of the interconnected network. We reduce the Hamilton-Jacobi-Equation satisfied by the value function of the investor to a system of Riccati equations, which we solve analytically, and obtain the optimal electricity trading strategy in closed-form. We show that including cross-border effects in the trading strategy specification significantly improves the performance of the strategy, that takes advantages of price differentials in interconnected locations. For example, for contracts with delivery at 1 p.m., we show that over a time horizon of one year, the optimal strategy delivers a profit that is approximately 250,000€ more than the profit of a naive strategy, which is based on the spread between locations (i.e., does not take into account cross-border effects)  

Contact person
Roberto Renò

Publication date
January 14, 2019