IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v81y2019icp528-535.html
   My bibliography  Save this article

Mitigating Hydrological Risk with Energy Derivatives

Author

Listed:
  • Fernandes, Gláucia
  • Lima Gomes, Leonardo
  • Teixeira Brandão, Luiz Eduardo

Abstract

The variability of river inflows affects the energy production of hydropower generators and may result in reductions in revenues that can be financially disruptive for these producers. Recent climatic changes have highlighted the risks involved in hydroelectriciy production in Brazil. In this paper, we propose a different approach to formulating a collar derivative, namely an Inverted Collar, to mitigate hydrological risk considering the particularities of Brazil's energy regulatory environment. In addition, we propose a customized collar-by-difference as a variation of the collar model. The effect of these derivatives is analyzed considering electricity market price and power generation uncertainty for a typical hydro generator. The results suggest that these derivatives are effective tools to manage hydrological risk during period of great climatic volatility, such as the height of the drought period experienced by Brazil in 2016. The results also indicate that our models outperform traditional commercial hedging commonly practiced by hydropower producers in the country.

Suggested Citation

  • Fernandes, Gláucia & Lima Gomes, Leonardo & Teixeira Brandão, Luiz Eduardo, 2019. "Mitigating Hydrological Risk with Energy Derivatives," Energy Economics, Elsevier, vol. 81(C), pages 528-535.
    • Handle: RePEc:eee:eneeco:v:81:y:2019:i:c:p:528-535
    DOI: 10.1016/j.eneco.2019.05.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988319301458
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2019.05.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Moreno, R. & Barroso, L.A. & Rudnick, H. & Mocarquer, S. & Bezerra, B., 2010. "Auction approaches of long-term contracts to ensure generation investment in electricity markets: Lessons from the Brazilian and Chilean experiences," Energy Policy, Elsevier, vol. 38(10), pages 5758-5769, October.
    2. Zeng, Yaxiong & Klabjan, Diego & Arinez, Jorge, 2015. "Distributed solar renewable generation: Option contracts with renewable energy credit uncertainty," Energy Economics, Elsevier, vol. 48(C), pages 295-305.
    3. Ansar, Atif & Flyvbjerg, Bent & Budzier, Alexander & Lunn, Daniel, 2014. "Should we build more large dams? The actual costs of hydropower megaproject development," Energy Policy, Elsevier, vol. 69(C), pages 43-56.
    4. Cheng, Chun-Tian & Shen, Jian-Jian & Wu, Xin-Yu & Chau, Kwok-wing, 2012. "Operation challenges for fast-growing China's hydropower systems and respondence to energy saving and emission reduction," Renewable and Sustainable Energy Reviews, Elsevier, vol. 16(5), pages 2386-2393.
    5. Zhang, M.M. & Zhou, P. & Zhou, D.Q., 2016. "A real options model for renewable energy investment with application to solar photovoltaic power generation in China," Energy Economics, Elsevier, vol. 59(C), pages 213-226.
    6. Patrick Jaillet & Ehud I. Ronn & Stathis Tompaidis, 2004. "Valuation of Commodity-Based Swing Options," Management Science, INFORMS, vol. 50(7), pages 909-921, July.
    7. Chang, XiaoLin & Liu, Xinghong & Zhou, Wei, 2010. "Hydropower in China at present and its further development," Energy, Elsevier, vol. 35(11), pages 4400-4406.
    8. Ferreira, Pedro Guilherme Costa & Oliveira, Fernando Luiz Cyrino & Souza, Reinaldo Castro, 2015. "The stochastic effects on the Brazilian Electrical Sector," Energy Economics, Elsevier, vol. 49(C), pages 328-335.
    9. Jatin Nathwani & Artie W. Ng, 2014. "Investing in the next generation of infrastructure for sustainable energy in Canada," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 4(3), pages 272-279, July.
    10. Vander Linden, David, 2005. "Denomination of currency decisions and zero-cost options collars," Journal of Multinational Financial Management, Elsevier, vol. 15(1), pages 85-98, February.
    11. Kao, Shih-Chieh & Sale, Michael J. & Ashfaq, Moetasim & Uria Martinez, Rocio & Kaiser, Dale P. & Wei, Yaxing & Diffenbaugh, Noah S., 2015. "Projecting changes in annual hydropower generation using regional runoff data: An assessment of the United States federal hydropower plants," Energy, Elsevier, vol. 80(C), pages 239-250.
    12. Fernandes, Gláucia & Gomes, Leonardo Lima & Brandão, Luiz Eduardo Teixeira, 2018. "A risk-hedging tool for hydro power plants," Renewable and Sustainable Energy Reviews, Elsevier, vol. 90(C), pages 370-378.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chen, Yong & Gibson, Nathan & Biswas, Arpan & Li, An & Bashiri, Hamid & Sharifi, Erfaneh & Fuentes, Claudio & Hoyle, Christopher & Leon, Arturo S. & Skypeck, Christopher J., 2021. "Valuation of operational flexibility: A case study of Bonneville power administration," Energy Economics, Elsevier, vol. 98(C).
    2. Jazmin Campos Zeballos & Zita Sebesvari & Jakob Rhyner & Markus Metz & Vinicius Bof Bufon, 2022. "Drought Risk Assessment of Sugarcane-Based Electricity Generation in the Rio dos Patos Basin, Brazil," Sustainability, MDPI, vol. 14(10), pages 1-24, May.
    3. Sagar Adhikari & Jirakiattikul Sopin & Kua-Anan Techato & Bibek Kumar Mudbhari, 2023. "A Systematic Review on Investment Risks in Hydropower to Developing Sustainable Renewable Energy Systems," International Journal of Energy Economics and Policy, Econjournals, vol. 13(2), pages 222-230, March.
    4. Giovanni Masala & Marco Micocci & Andrea Rizk, 2022. "Hedging Wind Power Risk Exposure through Weather Derivatives," Energies, MDPI, vol. 15(4), pages 1-30, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhang, M.M. & Wang, Qunwei & Zhou, Dequn & Ding, H., 2019. "Evaluating uncertain investment decisions in low-carbon transition toward renewable energy," Applied Energy, Elsevier, vol. 240(C), pages 1049-1060.
    2. Liu, Xiaoran & Ronn, Ehud I., 2020. "Using the binomial model for the valuation of real options in computing optimal subsidies for Chinese renewable energy investments," Energy Economics, Elsevier, vol. 87(C).
    3. Jaewon Jung & Sungeun Jung & Junhyeong Lee & Myungjin Lee & Hung Soo Kim, 2021. "Analysis of Small Hydropower Generation Potential: (2) Future Prospect of the Potential under Climate Change," Energies, MDPI, vol. 14(11), pages 1-26, May.
    4. Kozlova, Mariia, 2017. "Real option valuation in renewable energy literature: Research focus, trends and design," Renewable and Sustainable Energy Reviews, Elsevier, vol. 80(C), pages 180-196.
    5. Yakun Zhang & Wenzhe Tang & Colin F. Duffield & Lihai Zhang & Felix Kin Peng Hui, 2021. "Environment Management of Hydropower Development: A Case Study," Energies, MDPI, vol. 14(7), pages 1-12, April.
    6. Assereto, Martina & Byrne, Julie, 2021. "No real option for solar in Ireland: A real option valuation of utility scale solar investment in Ireland," Renewable and Sustainable Energy Reviews, Elsevier, vol. 143(C).
    7. Bao, Chao & Fang, Chuang-lin, 2013. "Geographical and environmental perspectives for the sustainable development of renewable energy in urbanizing China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 27(C), pages 464-474.
    8. Àlex Alonso-Travesset & Diederik Coppitters & Helena Martín & Jordi de la Hoz, 2023. "Economic and Regulatory Uncertainty in Renewable Energy System Design: A Review," Energies, MDPI, vol. 16(2), pages 1-30, January.
    9. Zhang, Mingming & Liu, Liyun & Wang, Qunwei & Zhou, Dequn, 2020. "Valuing investment decisions of renewable energy projects considering changing volatility," Energy Economics, Elsevier, vol. 92(C).
    10. Martina Assereto & Julie Byrne, 2020. "The Implications of Policy Uncertainty on Solar Photovoltaic Investment," Energies, MDPI, vol. 13(23), pages 1-20, November.
    11. Chang, Kai & Zeng, Yonghong & Wang, Weihong & Wu, Xin, 2019. "The effects of credit policy and financial constraints on tangible and research & development investment: Firm-level evidence from China's renewable energy industry," Energy Policy, Elsevier, vol. 130(C), pages 438-447.
    12. Hennig, Thomas & Wang, Wenling & Feng, Yan & Ou, Xiaokun & He, Daming, 2013. "Review of Yunnan's hydropower development. Comparing small and large hydropower projects regarding their environmental implications and socio-economic consequences," Renewable and Sustainable Energy Reviews, Elsevier, vol. 27(C), pages 585-595.
    13. Ming, Zeng & Honglin, Li & Mingjuan, Ma & Na, Li & Song, Xue & Liang, Wang & Lilin, Peng, 2013. "Review on transaction status and relevant policies of southern route in China's West–East Power Transmission," Renewable Energy, Elsevier, vol. 60(C), pages 454-461.
    14. Machado, Bruno Goulart F. & Bhagwat, Pradyumna C., 2020. "The impact of the generation mix on the current regulatory framework for hydropower remuneration in Brazil," Energy Policy, Elsevier, vol. 137(C).
    15. Shang, Yizi & Lu, Shibao & Ye, Yuntao & Liu, Ronghua & Shang, Ling & Liu, Chunna & Meng, Xianyong & Li, Xiaofei & Fan, Qixiang, 2018. "China’ energy-water nexus: Hydropower generation potential of joint operation of the Three Gorges and Qingjiang cascade reservoirs," Energy, Elsevier, vol. 142(C), pages 14-32.
    16. Zhang, Hanyu & Assereto, Martina & Byrne, Julie, 2023. "Deferring real options with solar renewable energy certificates," Global Finance Journal, Elsevier, vol. 55(C).
    17. Li, Yun & Li, Yanbin & Ji, Pengfei & Yang, Jing, 2015. "The status quo analysis and policy suggestions on promoting China׳s hydropower development," Renewable and Sustainable Energy Reviews, Elsevier, vol. 51(C), pages 1071-1079.
    18. Chen, Zhiyuan & Wang, Feng & Wang, Tieli & He, Rulin & Hu, Jieli & Li, Li & Luo, Ying & Qin, Yingling & Wang, Dingliang, 2024. "A real options approach to renewable energy module end-of-life decisions under multiple uncertainties: Application to PV and wind in China," Renewable Energy, Elsevier, vol. 226(C).
    19. Feng, Zhong-kai & Niu, Wen-jing & Cheng, Chun-tian & Liao, Sheng-li, 2017. "Hydropower system operation optimization by discrete differential dynamic programming based on orthogonal experiment design," Energy, Elsevier, vol. 126(C), pages 720-732.
    20. Jiao Wang & Lima Zhao & Arnd Huchzermeier, 2021. "Operations‐Finance Interface in Risk Management: Research Evolution and Opportunities," Production and Operations Management, Production and Operations Management Society, vol. 30(2), pages 355-389, February.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:81:y:2019:i:c:p:528-535. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.