IDEAS home Printed from https://ideas.repec.org/a/gam/jeners/v16y2022i1p393-d1019043.html
   My bibliography  Save this article

Insuring a Small Retail Electric Provider’s Procurement Cost Risk in Texas

Author

Listed:
  • Chi-Keung Woo

    (Department of Asian and Policy Studies, Education University of Hong Kong, Hong Kong, China)

  • Jay Zarnikau

    (Department of Economics, University of Texas at Austin, Austin, TX 78712, USA)

  • Asher Tishler

    (Coller School of Management, Tel Aviv University, Tel Aviv 69978, Israel)

  • Kang Hua Cao

    (Department of Economics, Hong Kong Baptist University, Kowloon Tong, Hong Kong, China)

Abstract

Motivated by the relatively infrequent but very large price spikes in the day-ahead and real-time energy markets operated by the Electric Reliability Council of Texas, this paper proposes an insurance that a small and risk-averse retailer in Texas (i.e., a retail electric provider (REP)) may buy to prevent financial insolvency caused by inadequate risk management. It also demonstrates the insurance’s practical design, pricing, and implementation. As participation in the REP’s procurement auction is voluntary, the insurance is mutually beneficial for the REP and the insurance seller. Hence, the proposed insurance is a newly developed wholesale market product that deserves consideration by REPs in Texas and competitive retailers elsewhere.

Suggested Citation

  • Chi-Keung Woo & Jay Zarnikau & Asher Tishler & Kang Hua Cao, 2022. "Insuring a Small Retail Electric Provider’s Procurement Cost Risk in Texas," Energies, MDPI, vol. 16(1), pages 1-12, December.
    • Handle: RePEc:gam:jeners:v:16:y:2022:i:1:p:393-:d:1019043
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/1996-1073/16/1/393/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/1996-1073/16/1/393/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Woo, Chi-Keung, 2001. "What went wrong in California's electricity market?," Energy, Elsevier, vol. 26(8), pages 747-758.
    2. Moore, J. & Woo, C.K. & Horii, B. & Price, S. & Olson, A., 2010. "Estimating the option value of a non-firm electricity tariff," Energy, Elsevier, vol. 35(4), pages 1609-1614.
    3. DeBenedictis, Andrew & Miller, David & Moore, Jack & Olson, Arne & Woo, C.K., 2011. "How Big Is the Risk Premium in an Electricity Forward Price? Evidence from the Pacific Northwest," The Electricity Journal, Elsevier, vol. 24(3), pages 72-76, April.
    4. Brown, D.P. & Tsai, C.H. & Woo, C.K. & Zarnikau, J. & Zhu, S., 2020. "Residential electricity pricing in Texas's competitive retail market," Energy Economics, Elsevier, vol. 92(C).
    5. C-K Woo & I Horowitz & B Horii & R I Karimov, 2004. "The efficient frontier for spot and forward purchases: an application to electricity," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 55(11), pages 1130-1136, November.
    6. Paul Klemperer, 2002. "What Really Matters in Auction Design," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 169-189, Winter.
    7. Fuentes, Rolando & Sengupta, Abhijit, 2020. "Using insurance to manage reliability in the distributed electricity sector: Insights from an agent-based model," Energy Policy, Elsevier, vol. 139(C).
    8. Deng, S.J. & Oren, S.S., 2006. "Electricity derivatives and risk management," Energy, Elsevier, vol. 31(6), pages 940-953.
    9. Woo, Chi-Keung & Lloyd, Debra & Tishler, Asher, 2003. "Electricity market reform failures: UK, Norway, Alberta and California," Energy Policy, Elsevier, vol. 31(11), pages 1103-1115, September.
    10. 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.
    11. Billimoria, Farhad & Poudineh, Rahmatallah, 2019. "Market design for resource adequacy: A reliability insurance overlay on energy-only electricity markets," Utilities Policy, Elsevier, vol. 60(C), pages 1-1.
    12. J. Zarnikau & C. Woo & R. Baldick, 2014. "Did the introduction of a nodal market structure impact wholesale electricity prices in the Texas (ERCOT) market?," Journal of Regulatory Economics, Springer, vol. 45(2), pages 194-208, April.
    13. 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.
    14. Paul L. Joskow, 2008. "Lessons Learned from Electricity Market Liberalization," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 9-42.
    15. Woo, Chi-Keung & Horowitz, Ira & Hoang, Khoa, 2001. "Cross hedging and forward-contract pricing of electricity," Energy Economics, Elsevier, vol. 23(1), pages 1-15, January.
    16. Woo, Chi-Keung & Horowitz, Ira & Olson, Arne & Horii, Brian & Baskette, Carmen, 2006. "Efficient frontiers for electricity procurement by an LDC with multiple purchase options," Omega, Elsevier, vol. 34(1), pages 70-80, January.
    17. 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).
    18. Lloyd, Debra & Woo, C. K. & Borden, Michael & Warrington, Ron & Baskette, Carmen, 2004. "Competitive Procurement and Internet-Based Auction: Electricity Capacity Option," The Electricity Journal, Elsevier, vol. 17(4), pages 74-78, May.
    19. Woo, C.K. & Lloyd, D. & Borden, M. & Warrington, R. & Baskette, C., 2004. "A robust internet-based auction to procure electricity forwards," Energy, Elsevier, vol. 29(1), pages 1-11.
    20. Iria, José & Soares, Filipe, 2019. "Real-time provision of multiple electricity market products by an aggregator of prosumers," Applied Energy, Elsevier, vol. 255(C).
    21. 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.
    22. 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.
    Full references (including those not matched with items on IDEAS)

    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. 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).
    2. 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.
    3. 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.
    4. Woo, C.K. & Milstein, I. & Tishler, A. & Zarnikau, J., 2019. "A wholesale electricity market design sans missing money and price manipulation," Energy Policy, Elsevier, vol. 134(C).
    5. Brown, D.P. & Tsai, C.H. & Woo, C.K. & Zarnikau, J. & Zhu, S., 2020. "Residential electricity pricing in Texas's competitive retail market," Energy Economics, Elsevier, vol. 92(C).
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. Woo, C.K. & King, M. & Tishler, A. & Chow, L.C.H., 2006. "Costs of electricity deregulation," Energy, Elsevier, vol. 31(6), pages 747-768.
    11. Zare, Kazem & Moghaddam, Mohsen Parsa & Sheikh El Eslami, Mohammad Kazem, 2010. "Electricity procurement for large consumers based on Information Gap Decision Theory," Energy Policy, Elsevier, vol. 38(1), pages 234-242, January.
    12. 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.
    13. Yu, Dongmin & liu, Huanan & Bresser, Charis, 2018. "Peak load management based on hybrid power generation and demand response," Energy, Elsevier, vol. 163(C), pages 969-985.
    14. David P. Brown & Jay Zarnikau & Chi-Keung Woo, 2020. "Does locational marginal pricing impact generation investment location decisions? An analysis of Texas’s wholesale electricity market," Journal of Regulatory Economics, Springer, vol. 58(2), pages 99-140, December.
    15. Horowitz, I. & Woo, C.K., 2006. "Designing Pareto-superior demand-response rate options," Energy, Elsevier, vol. 31(6), pages 1040-1051.
    16. Woo, Chi-Keung & Horowitz, Ira & Tishler, Asher, 2006. "A critical assessment of the Hong Kong Government's proposed post-2008 regulatory regime for local electricity utilities," Energy Policy, Elsevier, vol. 34(13), pages 1451-1456, September.
    17. 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).
    18. Woo, C.K. & Horowitz, I. & Moore, J. & Pacheco, A., 2011. "The impact of wind generation on the electricity spot-market price level and variance: The Texas experience," Energy Policy, Elsevier, vol. 39(7), pages 3939-3944, July.
    19. Woo, C.K. & Tishler, A. & Zarnikau, J. & Chen, Y., 2021. "Average residential outage cost estimates for the lower 48 states in the US," Energy Economics, Elsevier, vol. 98(C).
    20. Tishler, Asher & Milstein, Irena & Woo, Chi-Keung, 2008. "Capacity commitment and price volatility in a competitive electricity market," Energy Economics, Elsevier, vol. 30(4), pages 1625-1647, July.

    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:gam:jeners:v:16:y:2022:i:1:p:393-:d:1019043. 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: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    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.