Lyle, M.Elliott, R.2010-03-262010-03-262009Energy Economics, 2009; 31(5):757-7670140-9883http://hdl.handle.net/2440/57059Copyright © 2009 Elsevier B.V. All rights reserved.This paper presents a method for valuing power derivatives using a supply-demand approach. Our method extends work in the field by incorporating randomness into the base load portion of the supply stack function and equating it with a noisy demand process. We obtain closed form solutions for European option prices written on average spot prices considering two different supply models: a mean-reverting model and a Markov chain model. The results are extensions of the classic Black-Scholes equation. The model provides a relatively simple approach to describe the complicated price behaviour observed in electricity spot markets and also allows for computationally efficient derivatives pricing.enCopyright 2009 Elsevier B.V.Electricity pricingPower derivativesSeasonalityJournal article002009488210.1016/j.eneco.2009.05.0072-s2.0-6765074146336116