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Hedging Electricity Portfolio for a Hydro-energy Producer via Stochastic Programming

In: Stochastic Optimization Methods in Finance and Energy

Author

Listed:
  • Rosella Giacometti

    (University of Bergamo)

  • Maria Teresa Vespucci

    (Faculty of Engineering, University of Bergamo)

  • Marida Bertocchi

    (University of Bergamo)

  • Giovanni Barone Adesi

    (University of Lugano)

Abstract

A stochastic multistage portfolio model for a hydropower producer operating in a competitive electricity market is proposed. The producer’s portfolio includes the produced energy and a set of contracts for power delivery or purchase, including contracts of a financial nature such as forwards to be able to hedge against risks. The goal of using such a model is to maximise the profit of the producer and reduce the economic risks connected to the fact that energy spot and forward prices are highly volatile. We devise two scenario generation procedures: the first drives forward prices by the spot dynamics and the second models the forward curve dynamics directly. Our results, as expected, show that forward contracts are effective for hedging purposes and the optimal solution of the stochastic model with random coefficients generated by the second scenario procedure leads to the highest optimal value. Beyond financial gains, the advantage of using financial contracts consists in more efficient use of the hydroplant, allowing the possibility of pumping water and ending up with a higher final level of the reservoir.

Suggested Citation

  • Rosella Giacometti & Maria Teresa Vespucci & Marida Bertocchi & Giovanni Barone Adesi, 2011. "Hedging Electricity Portfolio for a Hydro-energy Producer via Stochastic Programming," International Series in Operations Research & Management Science, in: Marida Bertocchi & Giorgio Consigli & Michael A. H. Dempster (ed.), Stochastic Optimization Methods in Finance and Energy, edition 1, chapter 0, pages 163-179, Springer.
    • Handle: RePEc:spr:isochp:978-1-4419-9586-5_8
    DOI: 10.1007/978-1-4419-9586-5_8
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