Using electricity options to hedge against financial risks of power producers

• Main Authors: Salvador Pineda, Antonio J. Conejo
• Format: Article
• Language: English
• Published: IEEE 2013-01-01
• Series: Journal of Modern Power Systems and Clean Energy
• Subjects: Price risk; Availability risk; Stochastic programming; Forward contracts; Electricity options
• Online Access: https://ieeexplore.ieee.org/document/8939497/

As a consequence of competition in electricity markets, a wide variety of financial derivatives have emerged to allow market agents to hedge against risks. Electricity options and forward contracts constitute adequate instruments to manage the financial risks pertaining to price volatility or unexpected unit failures faced by power producers. A multi-stage stochastic model is described in this tutorial paper to determine the optimal forward and option contracting decisions for a risk-averse power producer. The key features of electricity options to reduce both price and availability risks are illustrated by using two examples.