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Going for Derivatives or Forwards? Minimizing Cashflow Fluctuations of Electricity Transactions on Power Markets

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  • Yuji Yamada

    (Faculty of Business Sciences, University of Tsukuba, Tokyo 112-0012, Japan)

  • Takuji Matsumoto

    (Socio-Economic Research Center, Central Research Institute of Electric Power Industry, Tokyo 100-8126, Japan)

Abstract

In a competitive electricity market, both electricity retailers and generators predict future prices and volumes and execute electricity delivery contracts through power exchange. In such circumstances, they may suffer from uncertainties caused by fluctuations in spot prices and future demand due to their high volatility. In this study, we develop a unified approach using derivatives and forwards on the spot electricity price and weather data to mitigate the cashflow fluctuation for power utilities. We aim to clarify the applicability of our proposed methods and provide a new and useful perspective on hedging schemes involving various electricity utilities, such as power retailers, solar photovoltaic (PV) generators, and thermal generators. Moreover, we analyze the risk of risk takers (such as the insurance companies in this study) in the derivatives market. In addition, we perform empirical simulations to measure out-of-sample hedging effects on their cashflow management using actual data in Japan.

Suggested Citation

  • Yuji Yamada & Takuji Matsumoto, 2021. "Going for Derivatives or Forwards? Minimizing Cashflow Fluctuations of Electricity Transactions on Power Markets," Energies, MDPI, vol. 14(21), pages 1-28, November.
    • Handle: RePEc:gam:jeners:v:14:y:2021:i:21:p:7311-:d:671846
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    4. Takuji Matsumoto & Yuji Yamada, 2023. "Improving the Efficiency of Hedge Trading Using Higher-Order Standardized Weather Derivatives for Wind Power," Energies, MDPI, vol. 16(7), pages 1-22, March.

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