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Gas Storage Valuation: Price Modelling v. Optimization Methods

Petter Bjerksund, Gunnar Stensland, and Frank Vagstad

Year: 2011
Volume: Volume 32
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No1-8
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Abstract:
In the literature, one approach is to analyse gas storage within a simple one-factor price dynamics framework that is solved to optimality. We follow an alternative approach, where the market is represented by a forward curve with daily granularity, the price uncertainty is represented by six factors, and where we impose a simple and intuitive storage strategy. Based on UK natural gas market price data, we obtain the gas storage value using our approach, and compare with results from a one-factor model as well as with perfect foresight. We find that our approach captures much more of the true flexibility value than the one-factor model.





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