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Balancing RES generation: Profitability of an energy trader

Author

Listed:
  • Christopher Kath
  • Weronika Nitka
  • Tomasz Serafin
  • Tomasz Weron
  • Przemyslaw Zaleski
  • Rafal Weron

Abstract

Motivated by a practical problem faced by an energy trading company in Poland, we investigate the profitability of balancing intermittent generation from renewable energy sources (RES). We consider a company that buys electricity generated by a pool of wind farms and pays their owners the day-ahead system price minus a commission, then sells the actually generated volume in the day-ahead and balancing markets. We evaluate the profitability (measured by the Sharpe ratio) and market risk faced by the energy trader as a function of the commission charged and the adopted trading strategy. We show that publicly available, country-wide RES generation forecasts can be significantly improved using a relatively simple regression model and that trading on this information yields significantly higher profits for the company. Moreover, we address the issue of contract design as a key performance driver. We argue that by offering tolerance range contracts, which transfer some of the risk to the wind farm owners, both parties can bilaterally agree on a suitable framework that meets individual risk appetite and profitability expectations.

Suggested Citation

  • Christopher Kath & Weronika Nitka & Tomasz Serafin & Tomasz Weron & Przemyslaw Zaleski & Rafal Weron, 2019. "Balancing RES generation: Profitability of an energy trader," HSC Research Reports HSC/19/07, Hugo Steinhaus Center, Wroclaw University of Science and Technology.
    • Handle: RePEc:wuu:wpaper:hsc1907
    as

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    File URL: http://www.im.pwr.wroc.pl/~hugo/RePEc/wuu/wpaper/HSC_19_07.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Electricity price; Day-ahead market; Balancing market; RES generation; Wind power forecast; Profitability; Sharpe ratio; Value-at-Risk; Trading strategy; Contract design;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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