Going for Derivatives or Forwards? Minimizing Cashflow Fluctuations of Electricity Transactions on Power Markets

Yuji Yamada and Takuji Matsumoto
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Yuji Yamada: Faculty of Business Sciences, University of Tsukuba, Tokyo 112-0012, Japan
Takuji Matsumoto: Socio-Economic Research Center, Central Research Institute of Electric Power Industry, Tokyo 100-8126, Japan

Energies, 2021, vol. 14, issue 21, 1-28

Abstract: In a competitive electricity market, both electricity retailers and generators predict future prices and volumes and execute electricity delivery contracts through power exchange. In such circumstances, they may suffer from uncertainties caused by fluctuations in spot prices and future demand due to their high volatility. In this study, we develop a unified approach using derivatives and forwards on the spot electricity price and weather data to mitigate the cashflow fluctuation for power utilities. We aim to clarify the applicability of our proposed methods and provide a new and useful perspective on hedging schemes involving various electricity utilities, such as power retailers, solar photovoltaic (PV) generators, and thermal generators. Moreover, we analyze the risk of risk takers (such as the insurance companies in this study) in the derivatives market. In addition, we perform empirical simulations to measure out-of-sample hedging effects on their cashflow management using actual data in Japan.

Keywords: cashflow management of electricity businesses; electricity derivatives and forwards; retailers and power producers; solar power and thermal energy; optimal hedging using nonparametric techniques; empirical simulations (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: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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