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A risk-hedging tool for hydro power plants

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

Abstract

Hydropower is the leading source of renewable energy generation and accounts for over 16% of total electricity production worldwide. Hydro energy investments, however, are subject to hydrological risk, which has increased in past decades due to climate change and more severe weather variations. Moreover, long-term conventional energy contracts rules require that power generators deliver a fixed quantity of energy regardless of the hydrological scenario, which may lead them to default on their energy contracts. In this article, a novel redesign of energy contracts is proposed so that hydropower generators are allowed to sell part of their energy per water availability. By adding this flexibility, the contracting rules can more closely mimic the physical operation of the system, where energy sources can be optimally switched between hydro and thermal plants depending on water availability, and the hydrological risk is reduced. We test the effectiveness of this new contract design in the Brazilian Electricity System, which faced a severe electricity crisis due to a prolonged drought between 2013 and 2016. The results suggest that this model can reduce the risk to the hydro generators with no impact on the total system cost.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:rensus:v:90:y:2018:i:c:p:370-378
    DOI: 10.1016/j.rser.2018.03.081
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    2. 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).
    3. 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.
    4. 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).
    5. Edson Bortoni & Zulcy de Souza & Augusto Viana & Helcio Villa-Nova & Ângelo Rezek & Luciano Pinto & Roberto Siniscalchi & Rafael Bragança & José Bernardes, 2019. "The Benefits of Variable Speed Operation in Hydropower Plants Driven by Francis Turbines," Energies, MDPI, vol. 12(19), pages 1-20, September.
    6. Lai, Shuying & Qiu, Jing & Tao, Yuechuan & Zhao, Junhua, 2021. "Risk hedging for gas power generation considering power-to-gas energy storage in three different electricity markets," Applied Energy, Elsevier, vol. 291(C).

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    More about this item

    Keywords

    Electricity sector; Hydropower; Hydrological risk; Contract hedge;
    All these keywords.

    JEL classification:

    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • P28 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Natural Resources; Environment
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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