Short-term Hedging for an Electricity Retailer

Abstract

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.

An Option Analysis of the European Union Renewable Energy Support Mechanisms

“…Altogether, this piece-meal approach contributed to economic inefficiency and waste. According to work for the EU Commission, in 2012 alone, the total support to solar and wind generation had risen to around €27 billion and over €33 billion was dispensed through feed-in tariffs and feed-in premiums (Ecofys, 2014). Measured on a per MWh basis, hundreds of Euros were being spent for each unit of electricity produced, while prices of electricity were stable to declining.…”

“…Although purchasing individual half-hourly options to hedge against this exposure is not possible in practice, the theoretical price of the option represents the cost for accepting such risk by the purchaser and is, ultimately, borne by the system. As a strategy on the part of utilities obliged to purchase RE, we assume risk neutrality, although assuming risk aversion would only make the cost of accepting such risk greater (Dupuis, 2016). If market prices fall, the exposure arising from the CfD grows, but through using put options that confer the right to sell at the incentive price, a purchaser of RE could, hypothetically, hedge the exposure because the price of the put option embodies this volatility.…”

“…For example, the largest 19 European countries more than doubled their renewable output between 2004 and 2013 but popular concerns have been raised about the affordability of renewable energy (RE) from the standpoint of consumers, business and industry (FT, 2015). In 2009 the total direct support for RE had risen to €17bn, whereas about €27bn was spent on subsidies to solar and wind powered electricity generation by 2012 (Ecofys, 2014). The capital costs of RE are falling but, because the output is both random and only available less than one-quarter of the time, its costs per unit of output are high.…”

Design Flaws in United Kingdom Renewable Energy Support Scheme

“…According to option theory, as shown in the table above, conditions of falling market prices or greater volatility in market prices would increase what one should charge for accepting the aforementioned risk. Falling prices and greater volatility have been observed in markets where RE plays an increasing role [96]. By implication, if incumbent generators cannot charge for accepting the risk of intermittent electricity output at incentive prices, then they, along with stakeholders, bear the cost.…”

Optimal hedging strategies for salmon producers

“…Within the seafood market, Martínez-Garmendia and Anderson (1999) study the hedging performance of shrimp futures at the Minneapolis Grain Exchange. Numerous other applications of futures contracts are documented for a wide range of commodity producing companies, such as gold miners (Betts and Mamik, 2011), oil and energy producers (Wallace and Fleten, 2003;Jin and Jorion, 2006), agricultural companies (Tomek and Peterson, 2001), and power companies (Fleten et al, 2002;Dupuis et al, 2016).…”