Electricity Portfolio Management: Optimal Peak / Off-Peak Allocations

Ronald Huisman, Ronald Mahieu and Felix Schlichter

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

Abstract: Electricity purchasers manage a portfolio of contracts in order to purchase the expected future electricity consumption profile of a company or a pool of clients. This paper proposes a mean-variance framework to address the concept of structuring the portfolio and focuses on how to allocate optimal positions in peak and off-peak forward contracts. It is shown that the optimal allocations are based on the difference in risk premiums per unit of day-ahead risk as a measure of relative costs of hedging risk in the day-ahead markets. The outcomes of the model are then applied to show 1) whether it is optimal to purchase a baseload consumption profile with a baseload forward contract and 2) that, under reasonable assumptions, risk taking by the purchaser is rewarded by lower expected costs.

Keywords: G11; electricity portfolio management; forward risk premiums; hedge ratio; optimal electricity sourcing (search for similar items in EconPapers)
JEL-codes: G3 M (search for similar items in EconPapers)
Date: 2007-12-07
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https://repub.eur.nl/pub/10775/ERS-2007-089-F&A.pdf (application/pdf)

Related works:
Journal Article: Electricity portfolio management: Optimal peak/off-peak allocations (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ems:eureri:10775

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