A risk-hedging tool for hydro power plants

Gláucia Fernandes, Leonardo Lima Gomes and Luiz Eduardo Teixeira Brandão

Renewable and Sustainable Energy Reviews, 2018, vol. 90, issue C, 370-378

Abstract: Hydropower is the leading source of renewable energy generation and accounts for over 16% of total electricity production worldwide. Hydro energy investments, however, are subject to hydrological risk, which has increased in past decades due to climate change and more severe weather variations. Moreover, long-term conventional energy contracts rules require that power generators deliver a fixed quantity of energy regardless of the hydrological scenario, which may lead them to default on their energy contracts. In this article, a novel redesign of energy contracts is proposed so that hydropower generators are allowed to sell part of their energy per water availability. By adding this flexibility, the contracting rules can more closely mimic the physical operation of the system, where energy sources can be optimally switched between hydro and thermal plants depending on water availability, and the hydrological risk is reduced. We test the effectiveness of this new contract design in the Brazilian Electricity System, which faced a severe electricity crisis due to a prolonged drought between 2013 and 2016. The results suggest that this model can reduce the risk to the hydro generators with no impact on the total system cost.

Keywords: Electricity sector; Hydropower; Hydrological risk; Contract hedge (search for similar items in EconPapers)
JEL-codes: O13 P28 Q25 Q41 Q42 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:rensus:v:90:y:2018:i:c:p:370-378

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DOI: 10.1016/j.rser.2018.03.081

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