Balancing RES generation: Profitability of an energy trader

Christopher Kath, Weronika Nitka, Tomasz Serafin, Tomasz Weron, Przemyslaw Zaleski and Rafał Weron

No HSC/19/07, HSC Research Reports from Hugo Steinhaus Center, Wroclaw University of Science and Technology

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 the 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: C51 C52 C53 G11 Q41 Q47 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2019-12-10
New Economics Papers: this item is included in nep-ene, nep-ore and nep-reg
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