Analysing flexible load contracts in the energy market

Abstract

In this paper we analyse flexible load contracts (FLC), a type of "swing" option. This contract type has existed in energy markets for a long time and has proved to be challenging to value. The term swing refers to the flexibility in the quantity of energy that the holder of the contract can receive. We formulate the FLC as a stochastic optimisation problem. The price process, modelled as a time dependent Ornstein-Uhlenbeck process, is calibrated to the spot price on the Nordic electricity market. With this process the optimisation problem is solved numerically. The results of the algorithm are compared with the exercise policy for nine market participants. We find that our algorithm obtain the highest accumulated exercise revenue for a five year period.