The doctoral dissertations of the former Helsinki University of Technology (TKK) and Aalto University Schools of Technology (CHEM, ELEC, ENG, SCI) published in electronic format are available in the electronic publications archive of Aalto University - Aaltodoc.

Electricity Derivative Markets: Investment Valuation, Production Planning and Hedging

Erkka Näsäkkälä

Dissertation for the degree of Doctor of Science in Technology to be presented with due permission of the Department of Engineering Physics and Mathematics for public examination and debate in Auditorium E at Helsinki University of Technology (Espoo, Finland) on the 23rd of June, 2005, at 12 o'clock noon.

Overview in PDF format (ISBN 951-22-7736-0)   [295 KB]
Dissertation is also available in print (ISBN 951-22-7687-9)


This thesis studies electricity derivative markets from a view point of an electricity producer. The traditionally used asset pricing methods, based on the no arbitrage principle, are extended to take into account electricity specific features: the non storability of electricity and the variability in the load process. The sources of uncertainty include electricity forward curve, prices of resources used to generate electricity, and the size of the future production. Also the effects of competitors' actions are considered. The thesis illustrates how the information in the derivative prices can be used in investment and production planning. In addition, the use of derivatives as a tool to stabilize electricity dependent cash flows is considered. The results indicate that the information about future electricity prices and their uncertainty, obtained from derivative markets, is important in investment analysis and production planning.

This thesis consists of an overview and of the following 5 publications:

  1. Murto P., Näsäkkälä E., and Keppo J., 2004. Timing of investments in oligopoly under uncertainty: a framework for numerical analysis. European Journal of Operational Research, volume 157, number 2, pages 486-500. © 2004 Elsevier Science. By permission.
  2. Näsäkkälä E. and Keppo J., 2005. Electricity load pattern hedging with static forward strategies. Managerial Finance, special issue on Energy Pricing and Risk Management, volume 31, number 6, pages 116-137. © 2005 Barmarick Publications. By permission.
  3. Näsäkkälä E. and Fleten S. E., 2004. Gas fired power plants: investment timing, operating flexibility and abandonment. Submitted Manuscript, Working Paper 04-03, Department of Industrial Economics and Technology Management, Norwegian University of Science and Technology. © 2004 by authors.
  4. Näsäkkälä E. and Fleten S. E., 2004. Flexibility and technology choice in gas fired power plant investments. Review of Financial Economics, to appear. © 2004 by authors and © 2004 Elsevier Science. By permission.
  5. Näsäkkälä E. and Keppo J., 2004. Hydropower production planning and hedging under inflow and forward uncertainty. Helsinki University of Technology, Systems Analysis Laboratory, Research Report E15. © 2004 by authors.

Keywords: asset pricing, real options, portfolio selection, electricity markets, forward curve

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© 2005 Helsinki University of Technology

Last update 2011-05-26