Risk-minimisation in electricity markets: Fixed price, unknown consumption

Martin Tegnér, Rune Ramsdal Ernstsen, Anders Skajaa and Rolf Poulsen

Energy Economics, 2017, vol. 68, issue C, 423-439

Abstract: This paper analyses risk management of fixed price, unspecified consumption contracts in energy markets. We model the joint dynamics of the spot-price and the consumption of electricity, study expected loss minimisation for different loss measures, and derive optimal static hedge strategies based on forward contracts. The strategies are implemented empirically and compared to a benchmark strategy widely used by the industry. On 2012–2014 Nordic market data, the suggested hedges significantly outperform the benchmark: The realised cumulative profit-and-losses are greater for almost every single one-month period and the hourly realised payoffs result in an approximate 65% out-performance probability. Hedges based on asymmetric loss measures yield markedly higher reward-to-risk ratios than the benchmark, which can be exploited to release a premium from the contract in the financially significant order of 1.5% of the fixed price.

Keywords: Quantity risk; Electricity markets; Hedging; Fixed price contracts (search for similar items in EconPapers)
JEL-codes: G13 G29 Q4 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0140988317303559
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:68:y:2017:i:c:p:423-439

DOI: 10.1016/j.eneco.2017.10.014

Access Statistics for this article

Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

More articles in Energy Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().