Electricity portfolio management: Optimal peak/off-peak allocations

R. Huisman, R.J. Mahieu, F. Schlichter

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Abstract

Electricity purchasers manage a portfolio of contracts in order to purchase the expected future electricity consumption profile of a company or a pool of clients. This paper proposes a mean-variance framework to address the concept of structuring the portfolio and focuses on how to optimally allocate positions in peak and off-peak forward contracts. It is shown that the optimal allocations are based on the difference in risk premiums per unit of day-ahead risk as a measure of relative costs of hedging risk in the day-ahead markets. The outcomes of the model are then applied to show (i) that it is typically not optimal to hedge a baseload consumption profile with a baseload forward contract and (ii) that, under reasonable assumptions, risk taking by the purchaser is rewarded by lower expected costs.
Original languageEnglish
Pages (from-to)169-174
JournalEnergy Economics
Volume31
Issue number1
Publication statusPublished - 2009

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    Huisman, R., Mahieu, R. J., & Schlichter, F. (2009). Electricity portfolio management: Optimal peak/off-peak allocations. Energy Economics, 31(1), 169-174.