Balancing Generation from Renewable Energy Sources: Profitability of an Energy Trader

Christopher Kath, Weronika Nitka, Tomasz Serafin, Tomasz Weron, Przemysław Zaleski and Rafał Weron
Additional contact information
Christopher Kath: RWE Supply & Trading GmbH, 45141 Essen, Germany
Przemysław Zaleski: Department of Operations Research and Business Intelligence, Wrocław University of Science and Technology, 50-370 Wrocław, Poland

Energies, 2020, vol. 13, issue 1, 1-15

Abstract: Motivated by a practical problem faced by an energy trading company in Poland, we investigate the profitability of balancing intermittent generation from renewable energy sources (RES). We consider a company that buys electricity generated by a pool of wind farms and pays their owners the day-ahead system price minus a commission, then sells the actually generated volume in the day-ahead and balancing markets. We evaluate the profitability (measured by the Sharpe ratio) and market risk faced by the energy trader as a function of the commission charged and the adopted trading strategy. We show that publicly available, country-wide RES generation forecasts can be significantly improved using a relatively simple regression model and that trading on this information yields significantly higher profits for the company. Moreover, we address the issue of contract design as a key performance driver. We argue that by offering tolerance range contracts, which transfer some of the risk to wind farm owners, both parties can bilaterally agree on a suitable framework that meets individual risk appetite and profitability expectations.

Keywords: electricity price; day-ahead market; balancing market; RES generation; wind power forecast; profitability; Sharpe ratio; Value-at-Risk; trading strategy; contract design (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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