Electricity Portfolio Management: Optimal Peak / Off-Peak Allocations

Preprint, Research English OPEN
Huisman, Ronald ; Mahieu, Ronald ; Schlichter, Felix (2007)
  • Publisher: Erasmus Research Institute of Management
  • Subject: G11, electricity portfolio management, forward risk premiums, hedge ratio, optimal electricity sourcing
    • jel: jel:M | jel:G3

textabstractElectricity purchasers manage a portfolio of contracts in order to purchase the expected future electricity consumption profile of a company or a pool of clients. This paper proposes a mean-variance framework to address the concept of structuring the portfolio and focuses on how to allocate optimal positions in peak and off-peak forward contracts. It is shown that the optimal allocations are based on the difference in risk premiums per unit of day-ahead risk as a measure of relative costs of hedging risk in the day-ahead markets. The outcomes of the model are then applied to show 1) whether it is optimal to purchase a baseload consumption profile with a baseload forward contract and 2) that, under reasonable assumptions, risk taking by the purchaser is rewarded by lower expected costs.
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