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Mitigating Hydrological Risk with Energy Derivatives

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  • 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.

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  • 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
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