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Evaluation of static hedging strategies for hydropower producers in the Nordic market

Author

Listed:
  • Stein-Erik Fleten
  • Espen BrÃ¥then
  • Sigurd-Erik Nissen-Meyer

Abstract

ABSTRACT In this paper we develop an optimization model to derive static hedge positions for hydropower producers with different risk characteristics. Previous research has primarily considered dynamic hedging; however, static hedging is the common choice among hydropower producers because of its simplicity. Our contribution is to evaluate such hedging out of sample. The hedging strategies we analyze include a natural hedge, which means no hedging, and output from an optimization model that we develop ourselves. The results show that, although optimized positions vary over time, hedging with the use of forward contracts significantly reduces the risk in terms of value-at-risk, conditional value-at-risk and standard deviation of the revenue. Furthermore, this improvement results in only a minor reduction in mean revenue.

Suggested Citation

  • Stein-Erik Fleten & Espen BrÃ¥then & Sigurd-Erik Nissen-Meyer, . "Evaluation of static hedging strategies for hydropower producers in the Nordic market," Journal of Energy Markets, Journal of Energy Markets.
    • Handle: RePEc:rsk:journ2:2160780
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    1. is not listed on IDEAS
    2. Kern, Jordan D. & Characklis, Gregory W., 2017. "Low natural gas prices and the financial cost of ramp rate restrictions at hydroelectric dams," Energy Economics, Elsevier, vol. 61(C), pages 340-350.
    3. Sanda, Gaute Egeland & Olsen, Eirik Tandberg & Fleten, Stein-Erik, 2013. "Selective hedging in hydro-based electricity companies," Energy Economics, Elsevier, vol. 40(C), pages 326-338.
    4. Machado, Bruno Goulart F. & Bhagwat, Pradyumna C., 2020. "The impact of the generation mix on the current regulatory framework for hydropower remuneration in Brazil," Energy Policy, Elsevier, vol. 137(C).
    5. Joakim Dimoski & Stein-Erik Fleten & Nils Löhndorf & Sveinung Nersten, 2023. "Dynamic hedging for the real option management of hydropower production with exchange rate risks," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 45(2), pages 525-554, June.
    6. Jakub Zezula, 2022. "Commodity risk hedging of a power producer: Case study of the Czech power market," ECONOMICS AND POLICY OF ENERGY AND THE ENVIRONMENT, FrancoAngeli Editore, vol. 2022(1), pages 17-32.
    7. Debbie Dupuis, Geneviève Gauthier, and Fréderic Godin, 2016. "Short-term Hedging for an Electricity Retailer," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).

    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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