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A Tailored Derivative Instrument to Mitigate the Price-and-Quantity Risk Faced by Wind Power Companies

Author

Listed:
  • Barbosa, Maria de Fatima
  • Street, Alexandre
  • Fanzeres, Bruno

Abstract

The intermittent nature of wind generation combined with the well-known volatility of electricity spot prices expose Wind Power Companies (WPCs) committed to long-term forward contracts to the so-called price-and-quantity risk. Several instruments were designed in the past years to mitigate this risk exposure. However, most of them were mainly constructed to cope with only one of its parts, i.e., price or generation uncertainty. To tackle this issue, in this work, we propose a tailored derivative instrument for WPCs leveraging the principles of options and renewable indexes. The effectiveness and attractiveness of the proposed instrument, referred to as the Wind-Indexed Option (WInd-Op), are evaluated with real data from the Brazilian sector through an equilibrium setup. We show that Solar Power Companies (SPCs) can be relevant candidates to back these derivatives. Additionally, when compared to the traditional put-and-call options as a benchmark, results indicate that the equilibrium obtained with the new derivative exhibits a significantly higher traded volume (2.9 times greater), lower premium prices (54.7% lower), and greater welfare gain (2.7 greater).

Suggested Citation

  • Barbosa, Maria de Fatima & Street, Alexandre & Fanzeres, Bruno, 2024. "A Tailored Derivative Instrument to Mitigate the Price-and-Quantity Risk Faced by Wind Power Companies," Energy Economics, Elsevier, vol. 136(C).
  • Handle: RePEc:eee:eneeco:v:136:y:2024:i:c:s0140988324003840
    DOI: 10.1016/j.eneco.2024.107676
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    More about this item

    Keywords

    Economic equilibrium; Electricity markets; Financial derivatives; Risk management; Renewable energy; Wind power index;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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