Valuation of electricity storage contracts using the COS method

TL;DR

This paper introduces a mathematical framework and valuation technique for electricity storage contracts, utilizing the COS method with a stochastic polynomial price model for accurate and efficient pricing.

Contribution

It provides a novel application of the COS method to electricity storage contract valuation considering physical and operational constraints.

Findings

COS method achieves high accuracy in contract pricing

Stochastic polynomial process models electricity prices effectively

Framework accommodates physical and operational constraints

Abstract

Storage of electricity has become increasingly important, due to the gradual replacement of fossil fuels by more variable and uncertain renewable energy sources. In this paper, we provide details on how to mathematically formalize a corresponding electricity storage contract, taking into account the physical limitations of a storage facility and the operational constraints of the electricity grid. We give details of a valuation technique to price these contracts, where the electricity prices follow a structural model based on a stochastic polynomial process. In particular, we show that the Fourier-based COS method can be used to price the contracts accurately and efficiently.