A model for hedging load and price risk in the Texas electricity market

Michael Coulon, Warren B. Powell and Ronnie Sircar

Energy Economics, 2013, vol. 40, issue C, 976-988

Abstract: Energy companies with commitments to meet customers' daily electricity demands face the problem of hedging load and price risk. We propose a joint model for load and price dynamics, which is motivated by the goal of facilitating optimal hedging decisions, while also intuitively capturing the key features of the electricity market. Driven by three stochastic factors including the load process, our power price model allows for the calculation of closed-form pricing formulas for forwards and some options, products often used for hedging purposes. Making use of these results, we illustrate in a simple example the hedging benefit of these instruments, while also evaluating the performance of the model when fitted to the Texas electricity market.

Keywords: Electricity market; Structural model; Spikes; Forward prices; Spread options; Hedging (search for similar items in EconPapers)
JEL-codes: C60 C80 G12 G13 Q40 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:40:y:2013:i:c:p:976-988

DOI: 10.1016/j.eneco.2013.05.020

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