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Integrated risk management for an electricity producer

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  • Falbo, P.
  • Felletti, D.
  • Stefani, S.

Abstract

Electricity suppliers face two sources of risk: uncertainty of spot prices and uncertainty of production costs. Uncertainty in selling the output is usually "solved" by signing forwards and the two sources of risk are dealt with separately. However, managing the integrated risk optimally is the direction we will suggest. We intend to analyse the problem a power producer is confronted to upon acting in a market where spot and forward agreements are available. Since forwards allow to sell production in advance at a given price but do not hedge against cost volatility, the total risk can be reduced by selling also in the spot market. The analysis is further detailed to encompass the spread option inherent in electricity production. We find a benchmark value for forwards to sign and the optimal spot/forward combinations. The analysis is carried out by accounting for market figures for input and output variables in the German market EEX.

Suggested Citation

  • Falbo, P. & Felletti, D. & Stefani, S., 2010. "Integrated risk management for an electricity producer," European Journal of Operational Research, Elsevier, vol. 207(3), pages 1620-1627, December.
    • Handle: RePEc:eee:ejores:v:207:y:2010:i:3:p:1620-1627
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    References listed on IDEAS

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    3. Falbo, Paolo & Felletti, Daniele & Stefani, Silvana, 2013. "Free EUAs and fuel switching," Energy Economics, Elsevier, vol. 35(C), pages 14-21.
    4. Bhattacharya, Saptarshi & Gupta, Aparna & Kar, Koushik & Owusu, Abena, 2020. "Risk management of renewable power producers from co-dependencies in cash flows," European Journal of Operational Research, Elsevier, vol. 283(3), pages 1081-1093.
    5. Rowan Adams & Tooraj Jamasb, 2016. "Optimal Power Generation Portfolios with Renewables: An Application to the UK," Working Papers EPRG 1620, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    6. Paolo Falbo & Carlos Ruiz, 2021. "Joint optimization of sales-mix and generation plan for a large electricity producer," Papers 2110.02016, arXiv.org.
    7. Falbo, Paolo & Ruiz, Carlos, 2023. "Joint optimization of sales-mix and generation plan for a large electricity producer," Energy Economics, Elsevier, vol. 120(C).
    8. Moret, Fabio & Pinson, Pierre & Papakonstantinou, Athanasios, 2020. "Heterogeneous risk preferences in community-based electricity markets," European Journal of Operational Research, Elsevier, vol. 287(1), pages 36-48.
    9. Falbo, Paolo & Ruiz, Carlos, 2019. "Optimal sales-mix and generation plan in a two-stage electricity market," Energy Economics, Elsevier, vol. 78(C), pages 598-614.
    10. Nadarajah, Selvaprabu & Secomandi, Nicola, 2023. "A review of the operations literature on real options in energy," European Journal of Operational Research, Elsevier, vol. 309(2), pages 469-487.
    11. Lima, Ricardo M. & Novais, Augusto Q. & Conejo, Antonio J., 2015. "Weekly self-scheduling, forward contracting, and pool involvement for an electricity producer. An adaptive robust optimization approach," European Journal of Operational Research, Elsevier, vol. 240(2), pages 457-475.
    12. Moghimi Ghadikolaei, Hadi & Ahmadi, Abdollah & Aghaei, Jamshid & Najafi, Meysam, 2012. "Risk constrained self-scheduling of hydro/wind units for short term electricity markets considering intermittency and uncertainty," Renewable and Sustainable Energy Reviews, Elsevier, vol. 16(7), pages 4734-4743.

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