Hedging Exposure to Electricity Price Risk in a Value at Risk Framework

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: This paper deals with the question how an electricity end-consumer or distribution company should structure its portfolio with energy forward contracts. This paper introduces a one period framework to determine optimal positions in peak and off-peak contracts in order to purchase future consumption volume. In this framework, the end-consumer or distribution company is assumed to minimize expected costs of purchasing respecting an ex-ante risk limit defined in terms of Value at Risk. Based on prices from the German EEX market, it is shown that a risk-loving agent is able to obtain lower expected costs than for a risk-averse agent.

Keywords: Electricity prices; Forward risk premium; Hedge ratios; Mean variance (search for similar items in EconPapers)
JEL-codes: G13 G3 M (search for similar items in EconPapers)
Date: 2007-02-21
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Citations: View citations in EconPapers (2)

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