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Valuation of an American option for the Spanish secondary reserve market using a machine learning model

A. Malpica, P. Frías

This paper presents an original methodology to design a financial product that could enhance the demand side participation in ancillary services, especially for industrial consumers. The financial product consists in an American option on the Spanish secondary reserve market for the following day, where the buyer has the right, but not the obligation to offer part of their capacity to the system operator. Considering this approach, an industrial consumer would receive an economic incentive to offer its flexibility to the system without changing its production planning, paying an upfront premium. The computation of the American option is based on a Monte Carlo simulation approach where the random paths are obtained from a machine learning model. The machine learning model attempts to forecast the 24 hour secondary band prices of the following day using a combination of different algorithms; the output and the error of the model are used as a baseline to perform the Monte Carlo simulation that computes the option value.

Keywords: Demand side management, electricity markets, American options, machine learning.

IEEE Transactions on Power Systems. Volumen: 34 Número: 1 Páginas: 544-554

Índice de impacto JCR y cuartil WoS: 6.074 - Q1 (2019)

Referencia DOI: DOI icon 10.1109/TPWRS.2018.2859762    

Publicado en papel: Enero 2019. Publicado on-line: Julio 2018.

A. Malpica, P. Frías. Valuation of an American option for the Spanish secondary reserve market using a machine learning model. IEEE Transactions on Power Systems. vol. 34, no. 1, pp. 544-554, Enero 2019. [Online: Julio 2018]

    Líneas de investigación:
  • Modelos de mercados eléctricos con alta penetración de generación renovable
  • Modelos estratégicos de ofertas

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