Static hedging of weather and price risks in electricity markets

Javier Pantoja Robayo, Juan C. Vera*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We present the closed-form solution to the problem of hedging price and quantity risks for energy retailers (ER), using financial instruments based on electricity price and weather indexes. Our model considers an ER who is intermediary in a regulated electricity market. ERs buy a fixed quantity of electricity at a variable cost and must serve a variable demand at a fixed cost. Thus ERs are subject to both price and quantity risks. To hedge such risks, an ER could construct a portfolio of financial instruments based on price and weather indexes. We construct the closed form solution for the optimal portfolio for the mean-VaR model in the discrete setting. Our model does not make any distributional assumption.

Original languageEnglish
JournalOptimization and Engineering
DOIs
Publication statusAccepted/In press - 2020

Keywords

  • Energy Markets
  • Risk Mitigation
  • Static Hedging
  • Weather Hedging

Fingerprint

Dive into the research topics of 'Static hedging of weather and price risks in electricity markets'. Together they form a unique fingerprint.

Cite this