Valuation of Electricity Swing Options by Multistage Stochastic Programming

Electricity swing options are American-style path-dependent power derivatives. We consider an electricity market driven by several exogenous risk factors and formulate the pricing problem for a class of swing option contracts with energy and power limits as well as ramping constraints. Efficient numerical solution of the arising multistage stochastic program requires aggregation of decision stages, discretization of the probability space, and reparameterization of the decision space. We report on insightful numerical results and discuss analytically tractable limiting cases.