Selective Hedging in Hydro-Based Electricity Companies

Eirik Tandberg Olsen, Gaute Egeland Sanda and Stein-Erik Fleten

MPRA Paper from University Library of Munich, Germany

Abstract: We analyze risk management trends in electricity commodity markets using the production and transaction data and written hedging policies of 12 Norwegian hydropower companies. The scope of our analysis is the hedging of physical electricity production using the power derivatives available at NASDAQ OMX Commodities. In their hedging policy, these companies either use a Cashflow at Risk (C-FaR) approach or a hedge ratio approach, or follow no explicitly stated approach. We find that the derivative cashflows constitute substantial profits for these companies. Furthermore, hedging contributes to reducing the C-FaR for 10 of the companies. These findings are surprising considering that we expect hedging to yield zero expected profit and to smooth the earnings function. Overall, our findings reveal that a practice of incorporating market views in hedging decisions is widespread in the sample companies, as both sanctioned in their written hedging policy and as indicated by the substantial hedging profits.

Keywords: Electricity markets; hedging; empirical evidence; production (search for similar items in EconPapers)
JEL-codes: G13 Q4 (search for similar items in EconPapers)
Date: 2010-06-11, Revised 2013-06-25
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/47820/1/MPRA_paper_47820.pdf original version (application/pdf)

Related works:
Journal Article: Selective hedging in hydro-based electricity companies (2013)
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:pra:mprapa:47820

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().