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Managing the financial risks of electricity producers using options

S. Pineda and A.J. Conejo

Energy Economics, 2012, vol. 34, issue 6, 2216-2227

Abstract: Electricity producers participating in electricity markets face risks pertaining to both selling prices and the availability of the production units. Among electricity derivatives, options represent an adequate instrument to manage these risks. In this paper, we propose a multi-stage stochastic model to determine the optimal selling strategy of a risk-averse electricity producer including options, forward contracts, and pool trading. A detailed case study highlights the advantages of an option vs. a forward contract to hedge against the financial risks related to pool prices and unexpected unit failures.

Keywords: Electricity market; Option; Forward contract; Electricity producer; Risk; Multi-stage stochastic programming (search for similar items in EconPapers)
JEL-codes: C02 C44 C52 C61 D53 D81 (search for similar items in EconPapers)
Date: 2012
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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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