Introduction

The purpose of this book is to build a framework to solve physical and financial commitment decisions contingent on electricity, in a deregulated market environment. The set of problems include valuing investment opportunities in physical assets, valuing and hedging obligations to serve customers, and the pricing of electricity dependent derivative contracts. Electricity markets suffer from a severe case of over-dimensionality. Due to the lack of economic storage of the commodity, each time interval of delivery can be considered a separate product. Furthermore, the scarcity and complexity of the transmission system leads to significant locational variations in price. The combination of the temporal and spatial properties of electricity poses significant barriers to market liquidity, and makes it exceedingly hard for market participants to solve valuation and risk management related optimization problems.