Evaluation of static hedging strategies for hydropower producers in the Nordic market

Fleten, Stein–Erik; Bråthen, Espen; Nissen-Meyer, Sigurd-Erik

doi:10.21314/jem.2010.050

Cited by 9 publications

(3 citation statements)

References 17 publications

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“…Accordingly, the purpose of this study is to examine hedging policies in electricity companies. While we follow comparable case studies on nonfinancial companies (Petersen and Thiagarajan, 2000;Brown, 2001;Adam and Fernando, 2006;Brown et al, 2006), and of electricity producers in particular (Fleten et al, , 2010(Fleten et al, , 2012, our approach is of a more positive than normative character. We attempt to describe and analyze how the hedging of commodity production is actually undertaken by highlighting policy, the associated financial transactions, and the results.…”

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confidence: 99%

Selective hedging in hydro-based electricity companies

2013

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We analyze risk management trends in electricity commodity markets using the production and transaction data and written hedging policies of 12 Norwegian hydropower companies. The scope of our analysis is the hedging of physical electricity production using the power derivatives available at NASDAQ OMX Commodities. In their hedging policy, these companies either use a Cashflow at Risk (C-FaR) approach or a hedge ratio approach, or follow no explicitly stated approach. We find that the derivative cashflows constitute substantial profits for these companies. Furthermore, hedging contributes to reducing the C-FaR for 10 of the companies. These findings are surprising considering that we expect hedging to yield zero expected profit and to smooth the earnings function. Overall, our findings reveal that a practice of incorporating market views in hedging decisions is widespread in the sample companies, as both sanctioned in their written hedging policy and as indicated by the substantial hedging profits.

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Section: (21)mentioning

confidence: 99%

Selective hedging in hydro-based electricity companies

2013

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“…Tanlapco et al (2002) compare the performance of direct versus cross hedging, the latter practice consisting of the use of futures on other commodities to hedge an exposure to electricity prices. Fleten et al (2010) optimize the static futures contract position of a hydro-power electricity producer in Nord Pool. Other papers studying static hedging incorporate load uncertainty in their model.…”

Section: Introductionmentioning

confidence: 99%

Short-term Hedging for an Electricity Retailer

Dupuis¹,

Gauthier²,

Godin³

2016

The Energy Journal

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A dynamic global hedging procedure making use of futures contracts is developed for a retailer of the electricity market facing price, load and basis risk. Statistical models reproducing stylized facts are developed for the electricity load, the day-ahead spot price and futures prices in the Nord Pool market. These models serve as input to the hedging algorithm, which also accounts for transaction fees. Backtests with market data from 2007 to 2012 show that the global hedging procedure provides considerable risk reduction when compared to hedging benchmarks found in the literature.

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“…A number of previous research studies have investigated approaches for hedging against uncertainty in hydropower revenues caused by fluctuations in inflows and electricity prices [ Mo et al ., ; Fleten et al ., ; Barroso et al ., ; Kristiansen , ; Fleten and Wallace , ; Fleten et al ., ]. However, these studies focus exclusively on hydrodominated systems, where reservoir inflows are a primary driver of electricity prices (low inflows cause dramatic increases in price because the market must replace lost hydropower production with much more expensive generation resources in order to meet demand).…”

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confidence: 99%

Natural gas price uncertainty and the cost‐effectiveness of hedging against low hydropower revenues caused by drought

Kern

Characklis

Foster

2015

Water Resources Research

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Prolonged periods of low reservoir inflows (droughts) significantly reduce a hydropower producer's ability to generate both electricity and revenues. Given the capital intensive nature of the electric power industry, this can impact hydropower producers' ability to pay down outstanding debt, leading to credit rating downgrades, higher interests rates on new debt, and ultimately, greater infrastructure costs. One potential tool for reducing the financial exposure of hydropower producers to drought is hydrologic index insurance, in particular, contracts structured to payout when streamflows drop below a specified level. An ongoing challenge in developing this type of insurance, however, is minimizing contracts' ''basis risk,'' that is, the degree to which contract payouts deviate in timing and/or amount from actual damages experienced by policyholders. In this paper, we show that consideration of year-to-year changes in the value of hydropower (i.e., the cost of replacing it with an alternative energy source during droughts) is critical to reducing contract basis risk. In particular, we find that volatility in the price of natural gas, a key driver of peak electricity prices, can significantly degrade the performance of index insurance unless contracts are designed to explicitly consider natural gas prices when determining payouts. Results show that a combined index whose value is derived from both seasonal streamflows and the spot price of natural gas yields contracts that exhibit both lower basis risk and greater effectiveness in terms of reducing financial exposure.

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Evaluation of static hedging strategies for hydropower producers in the Nordic market

Abstract: In this paper we develop an optimization model to derive

Cited by 9 publications

References 17 publications

Selective hedging in hydro-based electricity companies

Selective hedging in hydro-based electricity companies

Short-term Hedging for an Electricity Retailer

Natural gas price uncertainty and the cost‐effectiveness of hedging against low hydropower revenues caused by drought

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