A Gas Supply Agreement (GSA) is a contract for the supply of variable quantities of gas (within certain constraints) at regular intervals over a specified period of time at a specified set of prices. The quantity is typically limited by a maximum and minimum per period amount, which must be taken over a year otherwise a penalty is incurred at the end of the year.

A virtual Power Station (VPS) is a contract, representing a stylised power station, for the supply of variable quantities of electricity with certain constraints over a specified period of time at a specified set of prices. The supply of electricity is assumed to incur a cost per mega-watt hour (MWh). The rate of change of output of electricity has upper and lower bounds and a specified rate at which the output can be changed in MWh/minute. below the minimum capacity the output becomes zero implying the power station is not operating. When the output becomes zero it must remain zero for a minimum downtime. When the quantity becomes non-zero then a start-up cost is incurred.

Assuming there are efficient markets for gas and electricity then there are optimal strategies with respect to the market prices for taking gas under the GSA and for generating electricity under the VPS which maximise the value to the holder. The optimal behaviour at each decision date depends on the current state e.g. current spot price and current quantity taken or generated. The optimal strategy and value of these types of contracts also depends on the behaviour assumed for the spot prices.

In this workshop we shall review the modelling choices for the spot prices and valuation methodologies for GSA and VPS contracts.

References

Please feel free to bring this to the attention of interested colleagues.