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Insuring unit failures in electricity markets

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  • Pineda, S.
  • Conejo, A.J.
  • Carrión, M.
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    Abstract

    An electric energy producer participates in futures markets in the hope of hedging the risk of trading in the pool. However, this producer is required to supply the energy associated with all its signed forward contracts even if some of its units are forced out due to unexpected failures. In this case, the producer must purchase some of the energy needed to meet its futures market commitments in the pool, which may result in high losses if the pool prices happen to be higher than the forward contract prices. To mitigate these losses, the producer can take out insurance against the forced outages of its units. Using a stochastic programming model, this paper analyzes the convenience of signing an insurance against unit failure by an electric energy producer and its impact on forward contracting decisions. Results from a realistic case study are provided and analyzed.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 32 (2010)
    Issue (Month): 6 (November)
    Pages: 1268-1276

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    Handle: RePEc:eee:eneeco:v:32:y:2010:i:6:p:1268-1276

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    Web page: http://www.elsevier.com/locate/eneco

    Related research

    Keywords: Insurance contract Electricity markets Stochastic programming Unit forced outage rate;

    References

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    1. Huisman, R. & Mahieu, R.J. & Schlichter, F., 2009. "Electricity portfolio management: Optimal peak/off-peak allocations," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3130619, Tilburg University.
    2. Conejo, Antonio J. & Contreras, Javier & Espinola, Rosa & Plazas, Miguel A., 2005. "Forecasting electricity prices for a day-ahead pool-based electric energy market," International Journal of Forecasting, Elsevier, vol. 21(3), pages 435-462.
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    Cited by:
    1. Dorea Chin & Afzal Siddiqui, 2014. "Capacity expansion and forward contracting in a duopolistic power sector," Computational Management Science, Springer, vol. 11(1), pages 57-86, January.

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