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Hedging Wind Power Risk Exposure through Weather Derivatives

Author

Listed:
  • Giovanni Masala

    (Department of Economics and Business Sciences, University of Cagliari, Via S. Ignazio 74, 09123 Cagliari, Italy
    These authors contributed equally to this work.)

  • Marco Micocci

    (Department of Economics and Business Sciences, University of Cagliari, Via S. Ignazio 74, 09123 Cagliari, Italy
    These authors contributed equally to this work.)

  • Andrea Rizk

    (Department of Statistics Sciences, University of Rome La Sapienza, 00185 Rome, Italy
    These authors contributed equally to this work.)

Abstract

We introduce the industrial portfolio of a wind farm of a hypothetical company and its valuation consistent with the financial market. Next, we propose a static risk management policy originating from hedging against volumetric risk due to drops in wind intensity and we discuss the consequences. The hedging effectiveness firstly requires adequate modeling calibration and an extensive knowledge of these atypical financial (commodity) markets. In this hedging experiment, we find significant benefits for weather-sensitive companies, which can lead to new business opportunities. We provide a new financial econometrics approach to derive weather risk exposure in a typical wind farm. Our results show how accurate risk management can have a real benefit on corporate revenues. Specifically, we apply the spot market price simulation (SMaPS) model for the spot price of electricity. The parameters are calibrated using the prices of the French day-ahead market, and the historical series of the total hourly load is used as the final consumption. Next, we analyze wind speed and its relationship with electricity spot prices. As our main contribution, we demonstrate the effects of a hypothetical hedging strategy with collar options implemented against volumetric risk to satisfy demand at a specific time. Regarding the hedged portfolio, we observe that the “worst value” increases considerably while the earnings-at-risk (EaR) decreases. We consider only volumetric risk management, thus neglecting the market risk associated with electricity price volatility, allowing us to conclude that the hedging operation of our industrial portfolio provides substantial benefits in terms of the worst-case scenario.

Suggested Citation

  • Giovanni Masala & Marco Micocci & Andrea Rizk, 2022. "Hedging Wind Power Risk Exposure through Weather Derivatives," Energies, MDPI, vol. 15(4), pages 1-30, February.
    • Handle: RePEc:gam:jeners:v:15:y:2022:i:4:p:1343-:d:748234
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    References listed on IDEAS

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    Cited by:

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    2. Yuji Yamada & Takuji Matsumoto, 2023. "Construction of Mixed Derivatives Strategy for Wind Power Producers," Energies, MDPI, vol. 16(9), pages 1-26, April.
    3. 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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