Financing the Grid
University of Chicago Booth School of Business
Course Description
This course will provide a general introductory overview to fundamental instruments, and to foundational concepts and practice principles from industrial economics, statistics and engineering applicable to financing and valuation of grid-scale electricity storage and transmission capacity.
We will survey key principles underlying the engineering and economics of the grid, and introduce fundamental themes from applicable financial derivatives and natural resource and environmental economics, which are foundational to the application of Cournot models and real options analysis, as well as statistical and econometric specification of spatial models from industrial economics (locational and agglomerative models, capacitated market models) for storage and transmission in the context of binding technical constraints. Beginning with foundational principles for fundamental pricing instruments applicable to electricity generation, consumption, storage and transmission, lecture and discussion will address corresponding established and prospective industry practice related to spatial organization and colocation of industrial electricity supply and demand with additional implications for environmental and infrastructure regulation and finance, electricity trading and asset pricing (e.g., metals and ancillary commodity derivatives markets), as well as broader implications and impacts for political economy, energy policy and applied management science.
Topics to be addressed include: (i) Contracts-for-Differences (CfDs) and relative-value pricing to comparable instruments; (ii) volatility estimation and spread elasticities; (iii) load estimation/forecasting; (iv) state estimation of peak-load price regimes and volatility shocks; (iv) weather and weather volatility estimation/forecasting; (v) thermodynamics of power and energy density; (vi) measuring temperature extremes in terms of cooling degree days (CDDs), heating degree days (HDDs) and precipitation days; (vii) estimating conditional supply-demand spread elasticities to CfDs and spot spreads.
Principal Reference Texts:
- Creti, A. and F. Fontini, Economics of Electricity: Markets, Competition and Rules, Cambridge
- Copeland, T. and V. Antikarov, Real Options: A Practitioner’s Guide, Texere
- Brach, Marion A., Real Options in Practice, Wiley
Supplemental Reference Texts:
- Aagaard, T.S., A. N. Kleit, Electricity Capacity Markets, Cambridge
- Angwin, M., Shorting the Grid: The Hidden Fragility of Our Electric Grid, Carnot
- Burger, M., B. Graeber, Schindlmayr, Managing Energy Risk: A Practical Guide for Risk Management in Power, Gas and Other Energy Markets, 2nd Ed., Wiley
- Kirsch, D.S. and G. Strbac, Fundamentals of Power System Economics, 2nd Ed., Wiley
- Kristiansen, T., Risk Management in Electricity Markets: Theory, Methods and Applications, VDM Verlag
- Weber, C., D. Most and W. Fichtner, Economics of Power Systems: Fundamentals for Sustainable Energy, Wiley
Class Notes
- Week 1 (Mordecai): First Principles Applicable to Electricity Grid: Capacity Engineering and Economics
- Week 2 (Birge/Murphy – see Canvas): Foundational Models of Industry Cost & Market: Structure; Transmission & Congestion Contracting
- Week 3 (Mordecai – see Canvas): Real Options Taxonomy & Real Options Analysis (ROA): Application to Capacity Valuation/Financing
- Week 4 (Birge/Murphy – see Canvas): Monte Carlo & Lattice Valuation Methods
- Week 5 (Mordecai – see Canvas): Taxonomy of Contractual Arrangements & Instruments
- Week 6 (Birge/Murphy – see Canvas): Monte Carlo & Lattice Valuation Methods (cont’d)
- Week 7 (Mordecai – see Canvas): Alternative and Ancillary Data Applications to ROA
- Week 8 (Birge/Murphy – see Canvas): Lattice Methods Applications to Storage & Transmission
- Week 9 (Mordecai – see Canvas): Advanced Topics: Interdisciplinary Panel Discussion
