Pricing for exotic option of interruptible electricity contracts

The interruptible electricity contract with option is a valid risk-management tool, and the contract can be used to manage interruptible load in power market. The option coupled with the interruptible electricity contract is an exotic electricity options, the strict analytic solution of the exotic electricity option is almost impossible because of its complexity. Therefore we apply a Monte Carlo simulation to pricing the exotic option approximately, and the pricing formula is brought forward under no-arbitrage condition. The hybrid stochastic model for electricity spot price is developed through analyzing the inherent characteristics of historical price data. Numerical examples employ the data of New England power market to value the exotic option. The results show that the error is less than 5%, this indicates the method proposed is valid. Furthermore, the method can be used to price other electricity options.