Comparison of Electricity Spot Price Modelling and Risk Management Applications

Ethem Çanakoğlu and Esra Adıyeke
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Ethem Çanakoğlu: Industrial Engineering Department, Bahçeşehir University Beşiktaş, Istanbul 34353, Turkey
Esra Adıyeke: Industrial Engineering Department, Bahçeşehir University Beşiktaş, Istanbul 34353, Turkey

Energies, 2020, vol. 13, issue 18, 1-22

Abstract: In dealing with sharp changes in electricity prices, contract planning is considered as a vital risk management tool for stakeholders in deregulated power markets. In this paper, dynamics of spot prices in Turkish electricity market are analyzed, and predictive performance of several models are compared, i.e., time series models and regime-switching models. Different models for derivative pricing are proposed, and alternative portfolio optimization problems using mean-variance optimization and conditional value at risk (CVaR) are solved. Expected payoff and risk structure for different hedging strategies for a hypothetical electricity company with a given demand are analyzed. Experimental studies show that regime-switching models are able to capture electricity characteristics better than their standard counterparts. In addition, evaluations with various risk management models demonstrate that those models are highly competent in providing an effective risk control practice for electricity markets.

Keywords: electricity pricing; risk management; conditional value at risk (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: 2020
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