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Evaluation of different hedging strategies for commodity price risks of industrial cogeneration plants

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  • Palzer, Andreas
  • Westner, Günther
  • Madlener, Reinhard

Abstract

In this paper, we design and evaluate eight different strategies for hedging commodity price risks of industrial cogeneration plants. Price developments are parameterized based on EEX data from 2008 to 2011. The probability distributions derived are used to determine the value-at-risk (VaR) of the individual strategies, which are in a final step combined in a mean-variance portfolio analysis for determining the most efficient hedging strategy. We find that the strategy adopted can have a marked influence on the remaining price risk. Quarter futures are found to be particularly well suited for reducing market price risk. In contrast, spot trading of CO2 certificates is found to be preferable compared to forward market trading. Finally, portfolio optimization shows that a mix of various hedging strategies can further improve the profitability of a heat-based cogeneration plant.

Suggested Citation

  • Palzer, Andreas & Westner, Günther & Madlener, Reinhard, 2013. "Evaluation of different hedging strategies for commodity price risks of industrial cogeneration plants," Energy Policy, Elsevier, vol. 59(C), pages 143-160.
    • Handle: RePEc:eee:enepol:v:59:y:2013:i:c:p:143-160
    DOI: 10.1016/j.enpol.2013.03.006
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    Cited by:

    1. Dergiades, Theologos & Madlener, Reinhard & Christofidou, Georgia, 2018. "The nexus between natural gas spot and futures prices at NYMEX: Do weather shocks and non-linear causality in low frequencies matter?," The Journal of Economic Asymmetries, Elsevier, vol. 18(C), pages 1-1.
    2. Rohlfs, Wilko & Madlener, Reinhard, 2011. "Multi-Commodity Real Options Analysis of Power Plant Investments: Discounting Endogenous Risk Structures," FCN Working Papers 22/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    3. Tataraki, Kalliopi G. & Kavvadias, Konstantinos C. & Maroulis, Zacharias B., 2018. "A systematic approach to evaluate the economic viability of Combined Cooling Heating and Power systems over conventional technologies," Energy, Elsevier, vol. 148(C), pages 283-295.
    4. Oliveira, Sydnei Marssal de & Ribeiro, Celma de Oliveira & Cicogna, Maria Paula Vieira, 2018. "Uncertainty effects on production mix and on hedging decisions: The case of Brazilian ethanol and sugar," Energy Economics, Elsevier, vol. 70(C), pages 516-524.
    5. Kavvadias, K.C., 2016. "Energy price spread as a driving force for combined generation investments: A view on Europe," Energy, Elsevier, vol. 115(P3), pages 1632-1639.

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    More about this item

    Keywords

    Commodity price risk; Cogeneration; Portfolio optimization;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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