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Static hedging of weather and price risks in electricity markets

Pantoja Robayo, Javier / Vera, Juan C.

We present the closed-form solution to the problem of hedging price and quantity risks for energy retailers (ER), using financial instruments based on electricity price and weather indexes. Our model considers an ER who is intermediary in a regulated electricity market. ERs buy a fixed quantity of electricity at a variable cost and must serve a variable demand at a fixed cost. Thus ERs are subject to both price and quantity risks. To hedge such risks, an ER could construct a portfolio of financial instruments based on price and weather indexes. We construct the closed form solution for the optimal portfolio for the mean-VaR model in the discrete setting. Our model does not make any distributional assumption.

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Static hedging of weather and price risks in electricity markets

Pantoja Robayo, Javier / Vera, Juan C.

We present the closed-form solution to the problem of hedging price and quantity risks for energy retailers (ER), using financial instruments based on electricity price and weather indexes. Our model considers an ER who is intermediary in a regulated electricity market. ERs buy a fixed quantity of electricity at a variable cost and must serve a variable demand at a fixed cost. Thus ERs are subject to both price and quantity risks. To hedge such risks, an ER could construct a portfolio of financial instruments based on price and weather indexes. We construct the closed form solution for the optimal portfolio for the mean-VaR model in the discrete setting. Our model does not make any distributional assumption.

Static hedging of weather and price risks in electricity markets

Pantoja Robayo, Javier / Vera, Juan C.

We present the closed-form solution to the problem of hedging price and quantity risks for energy retailers (ER), using financial instruments based on electricity price and weather indexes. Our model considers an ER who is intermediary in a regulated electricity market. ERs buy a fixed quantity of electricity at a variable cost and must serve a variable demand at a fixed cost. Thus ERs are subject to both price and quantity risks. To hedge such risks, an ER could construct a portfolio of financial instruments based on price and weather indexes. We construct the closed form solution for the optimal portfolio for the mean-VaR model in the discrete setting. Our model does not make any distributional assumption.

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Title:

Static hedging of weather and price risks in electricity markets

Additional title:

Optim Eng

Contributors:

Pantoja Robayo, Javier (author) / Vera, Juan C. (author)

Published in:

Optimization and Engineering ; 22 ; 2779-2799

Publication date:

2021-12-01

Size:

21 pages

ISSN:

1573-2924 , 1389-4420

DOI:

https://doi.org/10.1007/s11081-020-09581-0

Type of media:

Article (Journal)

Type of material:

Electronic Resource

Language:

English

Keywords:

Static Hedging , Risk Mitigation , Weather Hedging , Energy Markets G0 , G13 , C15 , C32 , Mathematics , Optimization , Engineering, general , Systems Theory, Control , Environmental Management , Operations Research/Decision Theory , Financial Engineering , Mathematics and Statistics

Licence:

http://creativecommons.org/licenses/by/4.0/

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