Hydropower with Financial Information

E. Nasakkala and J. Keppo

Applied Mathematical Finance, 2008, vol. 15, issue 5-6, 503-529

Abstract: The paper considers a single utility company's long- and medium-term hydropower planning. The uncertainties are from the electricity forward curve and a random inflow. A simple and intuitive parameterization is given for the optimal production strategy. The accuracy of the parameterization is analysed by comparing its expected cash flows with the corresponding upper bound. In a test case the proposed method is compared with the realized production strategy of a Norwegian hydropower producer during winters 1997-2003. The parameterization gives earnings that are within 2.6% from the theoretical upper bound. Further, the results illustrate that during some years, part of the realized production strategy can be explained with the method, suggesting that during these years the forward curve information has already been incorporated in the production planning. However, even during the years when the correlation between the proposed strategy and the realized production is low, the strategy would have increased the realized earnings. This suggests that the information from the derivative markets would improve the production strategy.

Keywords: Electricity forward curve; hydropower production (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (8)

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DOI: 10.1080/13504860701852494

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