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Intraday hedging with financial options: the case of electricity

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  • Raphaël Homayoun Boroumand
  • Stéphane Goutte

Abstract

As market intermediaries, electricity suppliers purchase electricity from the wholesale market or self-generate to deliver their customers. However, electricity suppliers are uncertain about how much electricity their residential customers will use at any hour of the day until they actually turn switches on. While demand uncertainty is a common feature of all commodity markets, suppliers generally rely on storage to manage it. Singularly, electricity suppliers are exposed to joint volumetric and price risk on an hourly basis given the physical attributes of electricity. In the literature on electricity markets, few articles compare the efficiency of forward contracts, options and physical assets (i.e. power plants) within intraday hourly hedging portfolios, whereas electricity markets are precisely hourly markets. We analyse portfolios made of forwards, options and/or power plants for specific hourly clusters (9 am, 12 pm, 18 pm, 9 pm) based on electricity market data from 2013 to 2015 from the integrated German–Austrian spot market. Through a VaR model, we prove that intraday hedging with forwards is structurally inefficient compared to financial options and physical assets, no matter the cluster hour. Moreover, our results demonstrate the contribution of ‘out of the money’ options for all hours within volatile spot markets.

Suggested Citation

  • Raphaël Homayoun Boroumand & Stéphane Goutte, 2017. "Intraday hedging with financial options: the case of electricity," Applied Economics Letters, Taylor & Francis Journals, vol. 24(20), pages 1448-1454, November.
    • Handle: RePEc:taf:apeclt:v:24:y:2017:i:20:p:1448-1454
    DOI: 10.1080/13504851.2017.1284977
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    Cited by:

    1. Andrew Blohm & Jaden Crawford & Steven A. Gabriel, 2021. "Demand Response as a Real-Time, Physical Hedge for Retail Electricity Providers: The Electric Reliability Council of Texas Market Case Study," Energies, MDPI, vol. 14(4), pages 1-16, February.
    2. Russo, Marianna & Bertsch, Valentin, 2020. "A looming revolution: Implications of self-generation for the risk exposure of retailers," Energy Economics, Elsevier, vol. 92(C).

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