Managing the Risk of Power Short falls: A Case of Chasing One's Tail

Thomas Noe

No 375906, Competition & Regulation Times from New Zealand Institute for the Study of Competition and Regulation

Abstract: Electricity retailers sometimes find themselves in the situation where consumer demand exceeds their ability to supply. One possible response to this shortfall is to buy power on the spot market, but this is risky because of the volatile nature of spot prices. An alternative option is to hedge using financial derivatives. Thomas Noe outlines the complex hedging problem faced by power companies, describes the optimal strategy, and considers the feedback effect of this strategy on the underlying dynamics of the electricity spot market.

Date: 2007-07-01
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Persistent link: https://EconPapers.repec.org/RePEc:vuw:vuwcrt:375906

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