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Electricity Portfolio Management: Optimal Peak / Off-Peak Allocations

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  • Huisman, R.
  • Mahieu, R.J.
  • Schlichter, F.

Abstract

Electricity 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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File URL: http://hdl.handle.net/1765/10775
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Bibliographic Info

Paper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2007-089-F&A.

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Date of creation: 07 Dec 2007
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Handle: RePEc:dgr:eureri:1765010775

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Web page: http://www.erim.eur.nl/

Related research

Keywords: G11; electricity portfolio management; forward risk premiums; hedge ratio; optimal electricity sourcing;

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References

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  1. Huisman, R. & Mahieu, R.J., 2003. "Regime jumps in electricity prices," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3131736, Tilburg University.
    • Huisman, R. & Mahieu, R.J., 2001. "Regime Jumps in Electricity Prices," Research Paper ERS-2001-48-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
  2. Moschini, GianCarlo & Myers, Robert J., 2002. "Testing for Constant Hedge Ratios in Commodity Markets: A Multivariate Garch Approach," Staff General Research Papers 1945, Iowa State University, Department of Economics.
  3. Huisman, Ronald & Huurman, Christian & Mahieu, Ronald, 2007. "Hourly electricity prices in day-ahead markets," Energy Economics, Elsevier, vol. 29(2), pages 240-248, March.
  4. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  5. Mount, Timothy D. & Ning, Yumei & Cai, Xiaobin, 2006. "Predicting price spikes in electricity markets using a regime-switching model with time-varying parameters," Energy Economics, Elsevier, vol. 28(1), pages 62-80, January.
  6. 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, 06.
  7. Kroll, Yoram & Levy, Haim & Markowitz, Harry M, 1984. " Mean-Variance versus Direct Utility Maximization," Journal of Finance, American Finance Association, vol. 39(1), pages 47-61, March.
  8. Levy, H & Markowtiz, H M, 1979. "Approximating Expected Utility by a Function of Mean and Variance," American Economic Review, American Economic Association, vol. 69(3), pages 308-17, June.
  9. 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.
  10. Kanamura, Takashi & Ohashi, Kazuhiko, 2007. "A structural model for electricity prices with spikes: Measurement of spike risk and optimal policies for hydropower plant operation," Energy Economics, Elsevier, vol. 29(5), pages 1010-1032, September.
  11. Fama, Eugene F & French, Kenneth R, 1987. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums,and the Theory of Storage," The Journal of Business, University of Chicago Press, vol. 60(1), pages 55-73, January.
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Cited by:
  1. de Oliveira, Francisco Alexandre & de Paiva, Anderson Paulo & Lima, José Wanderley Marangon & Balestrassi, Pedro Paulo & Mendes, Ronã Rinston Amaury, 2011. "Portfolio optimization using Mixture Design of Experiments: Scheduling trades within electricity markets," Energy Economics, Elsevier, vol. 33(1), pages 24-32, January.
  2. Delarue, Erik & De Jonghe, Cedric & Belmans, Ronnie & D'haeseleer, William, 2011. "Applying portfolio theory to the electricity sector: Energy versus power," Energy Economics, Elsevier, vol. 33(1), pages 12-23, January.
  3. Pineda, S. & Conejo, A.J. & Carrión, M., 2010. "Insuring unit failures in electricity markets," Energy Economics, Elsevier, vol. 32(6), pages 1268-1276, November.

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