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Hydropower with Financial Information

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  • E. Nasakkala
  • J. Keppo

Abstract

The paper considers a single utility company's long- and medium-term hydropower planning. The uncertainties are from the electricity forward curve and a random inflow. A simple and intuitive parameterization is given for the optimal production strategy. The accuracy of the parameterization is analysed by comparing its expected cash flows with the corresponding upper bound. In a test case the proposed method is compared with the realized production strategy of a Norwegian hydropower producer during winters 1997-2003. The parameterization gives earnings that are within 2.6% from the theoretical upper bound. Further, the results illustrate that during some years, part of the realized production strategy can be explained with the method, suggesting that during these years the forward curve information has already been incorporated in the production planning. However, even during the years when the correlation between the proposed strategy and the realized production is low, the strategy would have increased the realized earnings. This suggests that the information from the derivative markets would improve the production strategy.

Suggested Citation

  • E. Nasakkala & J. Keppo, 2008. "Hydropower with Financial Information," Applied Mathematical Finance, Taylor & Francis Journals, vol. 15(5-6), pages 503-529.
    • Handle: RePEc:taf:apmtfi:v:15:y:2008:i:5-6:p:503-529
    DOI: 10.1080/13504860701852494
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    5. Elverhøi, Morten & Fleten, Stein-Erik & Fuss, Sabine & Heggedal, Ane Marte & Szolgayova, Jana & Troland, Ole Christian, 2010. "Evaluation of hydropower upgrade projects - a real options approach," MPRA Paper 23005, University Library of Munich, Germany.
    6. Ware, Antony, 2018. "Reliability-constrained hydropower valuation," Energy Policy, Elsevier, vol. 118(C), pages 633-641.
    7. Yangfang (Helen) Zhou & Alan Scheller‐Wolf & Nicola Secomandi & Stephen Smith, 2019. "Managing Wind‐Based Electricity Generation in the Presence of Storage and Transmission Capacity," Production and Operations Management, Production and Operations Management Society, vol. 28(4), pages 970-989, April.
    8. Secomandi, Nicola & Seppi, Duane J., 2014. "Real Options and Merchant Operations of Energy and Other Commodities," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 6(3-4), pages 161-331, July.

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