Aside from Black-Scholes with crazy skews, what major models are used for energy derivatives? I'm thinking particularly of electricity derivatives, but I'm also interested in natural gas and other volatile contracts(*).

(*): pun intended


2 Answers 2


That's a complicated question. There are many paths.

One path is to build a model of the underlying supply/demand relationships. For example, the sudden loss of a power supplier (or transmision corridor) shifts the supply curve to the left spiking the price. The key to the game is data, data, and more data (price, weather/wind, season, power loads, current power generation, stand-by generation, transmission line overload, etc).

There are several books written on the subject. If you dig around, you'll find everything from over-simplified books, to books that over-kill on a specific area of the business. Just a quick Google gives:



My reputation level is too low to post more links.

  • $\begingroup$ do you have any good sources for an introduction to supply/demand modelling in commodities? $\endgroup$
    – Trajan
    Dec 1, 2018 at 15:04
  • 1
    $\begingroup$ @Permian, Here's a link to a simple electrical demand model using monthly data: revgr.com/2012/11/06/… Here's the Youtube video for that article: youtube.com/watch?v=LzxOjdix614&t=81s You'll have to do some digging for a supply model. $\endgroup$
    – bill_080
    Dec 1, 2018 at 18:38

This guy listed a list of key papers relative to commodities price modeling. That could perhaps help you get started.


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