UK gas markets: The market price of risk and applications to multiple interruptible supply contracts

We employ the Schwartz and Smith [Schwartz, E., and J. Smith, 2000, Short-term variations and long-term dynamics in commodity prices, Management Science 46, 893-911.] model to explore the dynamics of the UK gas markets. We discuss in detail the short-term and long-term market prices of risk borne by the market players and how deviations from expected cyclical storage affect the short-term market price of risk. Finally, we illustrate an application of the model by pricing interruptible supply contracts that are currently traded in the UK.