IDEAS home Printed from https://ideas.repec.org/a/aen/journl/ej37-2-dupuis.html
   My bibliography  Save this article

Short-term Hedging for an Electricity Retailer

Author

Listed:
  • Debbie Dupuis, Geneviève Gauthier, and Fréderic Godin

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. Back-tests 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.

Suggested Citation

  • Debbie Dupuis, Geneviève Gauthier, and Fréderic Godin, 2016. "Short-term Hedging for an Electricity Retailer," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    • Handle: RePEc:aen:journl:ej37-2-dupuis
    as

    Download full text from publisher

    File URL: http://www.iaee.org/en/publications/ejarticle.aspx?id=2751
    Download Restriction: Access to full text is restricted to IAEE members and subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Martin Schweizer, 1995. "Variance-Optimal Hedging in Discrete Time," Mathematics of Operations Research, INFORMS, vol. 20(1), pages 1-32, February.
    2. Kanamura, Takashi & O[combining macron]hashi, Kazuhiko, 2008. "On transition probabilities of regime switching in electricity prices," Energy Economics, Elsevier, vol. 30(3), pages 1158-1172, May.
    3. François, Pascal & Gauthier, Geneviève & Godin, Frédéric, 2014. "Optimal hedging when the underlying asset follows a regime-switching Markov process," European Journal of Operational Research, Elsevier, vol. 237(1), pages 312-322.
    4. Nils-Henrik M. von der Fehr & Petter Vegard Hansen, 2010. "Electricity Retailing in Norway," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 25-46.
    5. Knittel, Christopher R. & Roberts, Michael R., 2005. "An empirical examination of restructured electricity prices," Energy Economics, Elsevier, vol. 27(5), pages 791-817, September.
    6. Unknown, 2005. "Forward," 2005 Conference: Slovenia in the EU - Challenges for Agriculture, Food Science and Rural Affairs, November 10-11, 2005, Moravske Toplice, Slovenia 183804, Slovenian Association of Agricultural Economists (DAES).
    7. Vehvilainen, Iivo & Pyykkonen, Tuomas, 2005. "Stochastic factor model for electricity spot price--the case of the Nordic market," Energy Economics, Elsevier, vol. 27(2), pages 351-367, March.
    8. Deng, S.J. & Oren, S.S., 2006. "Electricity derivatives and risk management," Energy, Elsevier, vol. 31(6), pages 940-953.
    9. Cartea, Álvaro & Villaplana, Pablo, 2008. "Spot price modeling and the valuation of electricity forward contracts: The role of demand and capacity," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2502-2519, December.
    10. Botterud, Audun & Kristiansen, Tarjei & Ilic, Marija D., 2010. "The relationship between spot and futures prices in the Nord Pool electricity market," Energy Economics, Elsevier, vol. 32(5), pages 967-978, September.
    11. Alizadeh, Amir H. & Nomikos, Nikos K. & Pouliasis, Panos K., 2008. "A Markov regime switching approach for hedging energy commodities," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1970-1983, September.
    12. H. N. E. BystrOm, 2003. "The hedging performance of electricity futures on the Nordic power exchange," Applied Economics, Taylor & Francis Journals, vol. 35(1), pages 1-11.
    13. Zanotti, Giovanna & Gabbi, Giampaolo & Geranio, Manuela, 2010. "Hedging with futures: Efficacy of GARCH correlation models to European electricity markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(2), pages 135-148, April.
    14. Redl, Christian & Haas, Reinhard & Huber, Claus & Böhm, Bernhard, 2009. "Price formation in electricity forward markets and the relevance of systematic forecast errors," Energy Economics, Elsevier, vol. 31(3), pages 356-364, May.
    15. repec:dau:papers:123456789/11532 is not listed on IDEAS
    16. Torro, Hipolit, 2009. "Assessing the influence of spot price predictability on electricity futures hedging," MPRA Paper 18892, University Library of Munich, Germany.
    17. Hahn, Heiko & Meyer-Nieberg, Silja & Pickl, Stefan, 2009. "Electric load forecasting methods: Tools for decision making," European Journal of Operational Research, Elsevier, vol. 199(3), pages 902-907, December.
    18. Abdel-Aal, R.E. & Al-Garni, A.Z., 1997. "Forecasting monthly electric energy consumption in eastern Saudi Arabia using univariate time-series analysis," Energy, Elsevier, vol. 22(11), pages 1059-1069.
    19. Johnsen, Tor Arnt, 2001. "Demand, generation and price in the Norwegian market for electric power," Energy Economics, Elsevier, vol. 23(3), pages 227-251, May.
    20. Deng, Shi-Jie & Xu, Li, 2009. "Mean-risk efficient portfolio analysis of demand response and supply resources," Energy, Elsevier, vol. 34(10), pages 1523-1529.
    21. Vehvilainen, Iivo & Keppo, Jussi, 2003. "Managing electricity market price risk," European Journal of Operational Research, Elsevier, vol. 145(1), pages 136-147, February.
    22. Sanda, Gaute Egeland & Olsen, Eirik Tandberg & Fleten, Stein-Erik, 2013. "Selective hedging in hydro-based electricity companies," Energy Economics, Elsevier, vol. 40(C), pages 326-338.
    23. Rafal Weron, 2006. "Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook0601.
    24. Hendrik Bessembinder & Michael L. Lemmon, 2002. "Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets," Journal of Finance, American Finance Association, vol. 57(3), pages 1347-1382, June.
    25. Ni, Jian & Chu, Lap Keung & Wu, Feng & Sculli, Domenic & Shi, Yuan, 2012. "A multi-stage financial hedging approach for the procurement of manufacturing materials," European Journal of Operational Research, Elsevier, vol. 221(2), pages 424-431.
    26. Alvaro Escribano & J. Ignacio Peña & Pablo Villaplana, 2011. "Modelling Electricity Prices: International Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73(5), pages 622-650, October.
    27. Hans FÃllmer & Peter Leukert, 2000. "Efficient hedging: Cost versus shortfall risk," Finance and Stochastics, Springer, vol. 4(2), pages 117-146.
    28. Fleten, Stein-Erik & Bråthen, Espen & Nissen-Meyer, Sigurd-Erik, 2010. "Evaluation of static hedging strategies for hydropower producers in the Nordic market," MPRA Paper 27133, University Library of Munich, Germany.
    29. Coulon, Michael & Powell, Warren B. & Sircar, Ronnie, 2013. "A model for hedging load and price risk in the Texas electricity market," Energy Economics, Elsevier, vol. 40(C), pages 976-988.
    30. St'ephane Goutte & Nadia Oudjane & Francesco Russo, 2012. "Variance Optimal Hedging for discrete time processes with independent increments. Application to Electricity Markets," Papers 1205.4089, arXiv.org.
    31. Yumi Oum & Shmuel S. Oren, 2010. "Optimal Static Hedging of Volumetric Risk in a Competitive Wholesale Electricity Market," Decision Analysis, INFORMS, vol. 7(1), pages 107-122, March.
    32. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
    33. Lucia, Julio J. & Torró, Hipòlit, 2011. "On the risk premium in Nordic electricity futures prices," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 750-763, October.
    34. Paul R. Kleindorfer & Lide Li, 2005. "Multi-Period VaR-Constrained Portfolio Optimization with Applications to the Electric Power Sector," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-26.
    35. Woo, Chi-Keung & Karimov, Rouslan I. & Horowitz, Ira, 2004. "Managing electricity procurement cost and risk by a local distribution company," Energy Policy, Elsevier, vol. 32(5), pages 635-645, March.
    36. Rocha, Paula & Kuhn, Daniel, 2012. "Multistage stochastic portfolio optimisation in deregulated electricity markets using linear decision rules," European Journal of Operational Research, Elsevier, vol. 216(2), pages 397-408.
    37. Johnsen, Tor Arnt & Olsen, Ole Jess, 2011. "Regulated and unregulated Nordic retail prices," Energy Policy, Elsevier, vol. 39(6), pages 3337-3345, June.
    38. Dennis Frestad & Fred Espen Benth & Steen Koekebakker, 2010. "Modeling Term Structure Dynamics in the Nordic Electricity Swap Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 53-86.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Carbonneau, Alexandre, 2021. "Deep hedging of long-term financial derivatives," Insurance: Mathematics and Economics, Elsevier, vol. 99(C), pages 327-340.
    2. Alexandre Carbonneau, 2020. "Deep Hedging of Long-Term Financial Derivatives," Papers 2007.15128, arXiv.org.
    3. Joakim Dimoski & Stein-Erik Fleten & Nils Löhndorf & Sveinung Nersten, 2023. "Dynamic hedging for the real option management of hydropower production with exchange rate risks," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 45(2), pages 525-554, June.
    4. Lawrence Haar, 2021. "Design Flaws in United Kingdom Renewable Energy Support Scheme," Energies, MDPI, vol. 14(6), pages 1-26, March.
    5. Schütz, Peter & Westgaard, Sjur, 2018. "Optimal hedging strategies for salmon producers," Journal of Commodity Markets, Elsevier, vol. 12(C), pages 60-70.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zarnikau, J. & Woo, C.K. & Zhu, S. & Tsai, C.H., 2019. "Market price behavior of wholesale electricity products: Texas," Energy Policy, Elsevier, vol. 125(C), pages 418-428.
    2. Woo, C.K. & Moore, J. & Schneiderman, B. & Ho, T. & Olson, A. & Alagappan, L. & Chawla, K. & Toyama, N. & Zarnikau, J., 2016. "Merit-order effects of renewable energy and price divergence in California’s day-ahead and real-time electricity markets," Energy Policy, Elsevier, vol. 92(C), pages 299-312.
    3. Woo, C.K. & Chen, Y. & Olson, A. & Moore, J. & Schlag, N. & Ong, A. & Ho, T., 2017. "Electricity price behavior and carbon trading: New evidence from California," Applied Energy, Elsevier, vol. 204(C), pages 531-543.
    4. Woo, C.K. & Shiu, A. & Liu, Y. & Luo, X. & Zarnikau, J., 2018. "Consumption effects of an electricity decarbonization policy: Hong Kong," Energy, Elsevier, vol. 144(C), pages 887-902.
    5. Woo, C.K. & Zarnikau, J. & Moore, J. & Horowitz, I., 2011. "Wind generation and zonal-market price divergence: Evidence from Texas," Energy Policy, Elsevier, vol. 39(7), pages 3928-3938, July.
    6. Cao, K.H. & Qi, H.S. & Tsai, C.H. & Woo, C.K. & Zarnikau, J., 2021. "Energy trading efficiency in the US Midcontinent electricity markets," Applied Energy, Elsevier, vol. 302(C).
    7. Woo, C.K. & Sreedharan, P. & Hargreaves, J. & Kahrl, F. & Wang, J. & Horowitz, I., 2014. "A review of electricity product differentiation," Applied Energy, Elsevier, vol. 114(C), pages 262-272.
    8. Zhang, Yue & Farnoosh, Arash, 2019. "Analyzing the dynamic impact of electricity futures on revenue and risk of renewable energy in China," Energy Policy, Elsevier, vol. 132(C), pages 678-690.
    9. Algieri, Bernardina & Leccadito, Arturo & Tunaru, Diana, 2021. "Risk premia in electricity derivatives markets," Energy Economics, Elsevier, vol. 100(C).
    10. Iván Blanco, Juan Ignacio Peña, and Rosa Rodriguez, 2018. "Modelling Electricity Swaps with Stochastic Forward Premium Models," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    11. Weron, Rafał, 2014. "Electricity price forecasting: A review of the state-of-the-art with a look into the future," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1030-1081.
    12. Zhang Yue & Arash Farnoosh, 2018. "Analysing the Dynamic Impact of Electricity Futures on Revenue and Risks of Renewable Energy in China," Working Papers hal-03188814, HAL.
    13. Fleten, Stein-Erik & Hagen, Liv Aune & Nygård, Maria Tandberg & Smith-Sivertsen, Ragnhild & Sollie, Johan M., 2015. "The overnight risk premium in electricity forward contracts," Energy Economics, Elsevier, vol. 49(C), pages 293-300.
    14. Weron, Rafał & Zator, Michał, 2014. "Revisiting the relationship between spot and futures prices in the Nord Pool electricity market," Energy Economics, Elsevier, vol. 44(C), pages 178-190.
    15. Chi-Keung Woo, Ira Horowitz, Jay Zarnikau, Jack Moore, Brendan Schneiderman, Tony Ho, and Eric Leung, 2016. "What Moves the Ex Post Variable Profit of Natural-Gas-Fired Generation in California?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    16. Rubin, Ofir David, 2010. "Equilibrium pricing in electricity markets with wind power," ISU General Staff Papers 201001010800002361, Iowa State University, Department of Economics.
    17. Mayer, Klaus & Trück, Stefan, 2018. "Electricity markets around the world," Journal of Commodity Markets, Elsevier, vol. 9(C), pages 77-100.
    18. Chi-Keung Woo, Ira Horowitz, Brian Horii, Ren Orans, and Jay Zarnikau, 2012. "Blowing in the Wind: Vanishing Payoffs of a Tolling Agreement for Natural-gas-fired Generation of Electricity in Texas," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    19. Füss, Roland & Mahringer, Steffen & Prokopczuk, Marcel, 2015. "Electricity derivatives pricing with forward-looking information," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 34-57.
    20. Nowotarski, Jakub & Tomczyk, Jakub & Weron, Rafał, 2013. "Robust estimation and forecasting of the long-term seasonal component of electricity spot prices," Energy Economics, Elsevier, vol. 39(C), pages 13-27.

    More about this item

    JEL classification:

    • F0 - International Economics - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aen:journl:ej37-2-dupuis. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: David Williams (email available below). General contact details of provider: https://edirc.repec.org/data/iaeeeea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.