Contributions published at Quantitative Finance (Marc Chesney)

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Using a real options model, this paper quantifies a gas-fired power plant’s operating value and the value of a new investment against the background of a market transition to renewable electricity. The model is run with recent data for Germany’s power sector and for different types of gas-fired power plants. The result is twofold. First, the paper achieves a more realistic value by improving on existing models: it models electricity and gas prices as a two-dimensional stochastic process, each component consisting of the sum of a seasonal pattern and a mean-reverting process; it uses high granularity by modelling hourly time-steps; and it incorporates power plant ramping times and costs. Second, it compares two types of power plant models, one with daily and one with hourly operating decisions, and thereby quantifies the value of a plant’s intraday flexibility. The hourly model replicates operators’ and investors’ decision making accurately. This is evidenced by the fact that the results trace current major developments like the recent decline and come-back of gas-fired generation in Germany. The paper contributes to a better understanding of the choices operators and investors face in current electricity markets. In the absence of large scale storage solutions flexible supply of electricity, as provided by gas, is important in the transition to renewable energies in Germany and across Europe.

Germany is in the midst of a radical transformation of its power sector, which in 2016 led two of its main electric utilities, EON and RWE, to undertake dramatic restructurings. EON spun off its fossil fuel and trading segments, while RWE carved out its renewable energy, retail and grid business. The paper examines the drivers of these divestitures. Building on corporate finance literature, the paper uses a mix of comparative descriptive statistics, interviews and event studies to test four groups of hypotheses. The evidence rejects drivers related to operations and management, biased investment and investor preferences and instead points to financing-related drivers. Among the financing-related drivers, debt overhang and risk contamination seemed to have played the main role. Utilities restructured to save their healthy assets (renewables and grid infrastructure) from losses at their conventional power generation business (fossil fuel and nuclear plants). Already weakened from record losses in their fossil fuel powered generation fleet due to low electricity prices, after 2011 the nuclear exit emerged as an additional challenge to the utilities. Investors doubted the adequacy of utilities provisions for decommissioning nuclear power plants and storing toxic waste, and feared major cost increases for which the utilities would be unlimitedly liable. The paper uses existing research on divestitures in an empirical case that has implications for the evolution of European power markets. The results suggest that exiting conventional technologies as part of the transition to a more renewable energy mix might cause substantial costs. If these are not clarified and allocated ex ante, policy makers might find themselves forced to either burden tax payers or endanger utilities that are of systemic relevance to the energy sector.

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Under short-sales prohibitions, no free lunch with vanishing risk (NFLVRS) is known to be equivalent to the existence of an equivalent supermartingale measure for the price process (Pulido in Ann. Appl. Probab. 24:54–75, 2014). We give a necessary condition for the drift of a price process to satisfy NFLVRS. For two given price processes, we introduce the concept of fundamental supermartingale measure, and when a certain condition necessary for the construction of this fundamental supermartingale measure is not fulfilled, we provide the corresponding arbitrage portfolios. The motivation of our study lies in understanding the particular case of converging prices, i.e., two prices that coincide at a bounded random time.

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We use the theory of coherent measures to look at the problem of surplus sharing in an insurance business. The surplus share of an insured is calculated by the surplus premium in the contract. The theory of coherent risk measures and the resulting capital allocation gives a way to divide the surplus between the insured and the capital providers, i.e., the shareholders.

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