The efficient frontier for spot and forward purchases: an application to electricity

Chi-Keung Woo, I Horowitz, B Horii and R I Karimov
Additional contact information
I Horowitz: University of Florida
B Horii: Energy and Environmental Economics, Inc.
R I Karimov: Energy and Environmental Economics, Inc.

Journal of the Operational Research Society, 2004, vol. 55, issue 11, 1130-1136

Abstract: Abstract A local electricity distribution company (LDC) can reduce its exposure to the inherent risks of spot-price volatility and uncertain future demand via forward contracts. Management's problem is to determine the optimal forward-contract purchase. We propose a practical three-stage approach for dealing with the problem. The first stage determines an optimal purchase by solving a cost-constrained risk-minimization problem. The second stage derives the efficient frontier of tradeoffs between expected cost and cost risk from the first-stage solution, at various bounds on the expected cost. The optimal solution is found by melding the frontier with management's risk preferences. In the third stage, the model's parameters are estimated from data typically available to an LDC and used to determine its forward-contract purchase.

Keywords: electricity; risk; decision analysis; nonlinear programming (search for similar items in EconPapers)
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

Downloads: (external link)
http://link.springer.com/10.1057/palgrave.jors.2601769 Abstract (text/html)
Access to full text is restricted to subscribers.

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:pal:jorsoc:v:55:y:2004:i:11:d:10.1057_palgrave.jors.2601769

Ordering information: This journal article can be ordered from
http://www.springer. ... search/journal/41274

DOI: 10.1057/palgrave.jors.2601769

Access Statistics for this article

Journal of the Operational Research Society is currently edited by Tom Archibald and Jonathan Crook

More articles in Journal of the Operational Research Society from Palgrave Macmillan, The OR Society
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().