  Reliability Options are capacity remuneration mechanisms aimed at enhancing
security of supply in electricity systems. They can be framed as call options
on electricity sold by power producers to System Operators. This paper provides
a comprehensive mathematical treatment of Reliability Options. Their value is
first derived by means of closed-form pricing formulae, which are obtained
under several assumptions about the dynamics of electricity prices and strike
prices. Then, the value of the Reliability Option is simulated under a
real-market calibration, using data of the Italian power market. We finally
perform sensitivity analyses to highlight the impact of the level and
volatility of both power and strike price, of the mean reversion speeds and of
the correlation coefficient on the Reliability Options' value.

Pricing of Securities