Fleten, Stein-Erik and Bråthen, Espen and Nissen-Meyer, Sigurd-Erik (2010): Evaluation of static hedging strategies for hydropower producers in the Nordic market. Forthcoming in: Journal of Energy Markets , Vol. 3, No. 4 (2010): pp. 1-28.
Download (305kB) | Preview
In this paper we develop an optimization model to derive static hedge positions for hydropower producers with different risk characteristics. Previous research has primarily considered dynamic hedging; however, static hedging is the common choice among hydropower producers because of its simplicity. Our contribution is to evaluate such hedging out of sample. The hedging strategies we analyze include a natural hedge, which means no hedging, and output from an optimization model that we develop ourselves. The results show that, although optimized positions vary over time, hedging with use of forward contracts significantly reduces the risk in terms of value-at-risk, conditional value-at-risk and standard deviation of the revenue. Furthermore, this improvement results in only a minor reduction in mean revenue.
|Item Type:||MPRA Paper|
|Original Title:||Evaluation of static hedging strategies for hydropower producers in the Nordic market|
|Keywords:||Risk management; Static hedging; Hydropower producers; Nordic electricity market; Risk premium|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill
Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy
|Depositing User:||Stein-Erik Fleten|
|Date Deposited:||02. Dec 2010 10:00|
|Last Modified:||16. Mar 2015 13:20|
Benth, F.E., Benth, J. S., Koekebakker, S. (2008). Stochastic Modelling of Electricity and Related Markets, World Scientific.
Bessembinder, H., Lemmon, M. L. (2002). Equilibrium Pricing and Optimal Hedging In Electricity Forward Markets. Journal of Finance, 57(3), 1347-1382.
Bjerksund, P., Stensland, G., Vagstad, F., Gas Storage Valuation. (2008). Price Modelling v. Optimization Methods. Working Paper, Norwegian School of Economics and Business Administration.
Bolinger, M., Wiser, R., Golove, W. (2002). Quantifying the value that wind power provides as a hedge against volatile natural gas prices. Proceedings of Windpower 2002. Portland, OR, 2-5 June 2002.
Botnen, O.J. , Johannesen, A., Haugstad, A., Kroken, S., Frystein, O. (1992). Modelling of hydropower scheduling in a national/international context, In: Proceedings of the 2nd International Conference on Hydropower. Hydropower ‘92, Lillehammer, Norway, June 1992, Balkema: Rotterdam.
Brown G.W., Toft, K.B. (2002). How firms should hedge, The Review of Financial Studies, 15(4), 1283-1324.
Conejo, A.J., Garcia-Bertrand R., Carrión M., Caballero, M., de Andrés, A. (2008), Optimal involvement in futures markets of a power producer, IEEE Transactions on Power Systems, 23, 703-711
Egeland, O., Hegge, J., Kylling, E. Nes, J. (1982). The extended power pool model - Operation planning of multi-river and multi-reservoir hydrodominated power production system - a hierarchical approach, Report 32.14, CIGRE.
Furió, D. and Meneu, V. (2010). Expectations and Forward Risk Premium in the Spanish Deregulated Power Market, Energy Policy, 38(2), pp. 784-793.
Fleten, S.-E., Keppo, J. and Näsäkkälä, E. (2011). Risk management in electric utilities. In P. Kouvelis, O. Boyabatli, L. Dong, R. Li, eds. Handbook for Integrated Risk Management in Global Supply Chains, Wiley
Fleten, S.-E.,Wallace, S.W., Ziemba, W.T. (2002). Hedging electricity portfolios via stochastic programming. In: C. Greengard, A. Ruszczynski, eds. Decision Making Under Uncertainty: Energy and Power. The IMA Volumes in Mathematics and Its Applications, New York: Springer, 71-94.
Geman, H., Vasicek, O. (2001). Forwards and futures on non-storable commodities: the case of electricity. RISK 2001, August 2001.
Gjølberg, O. (2001). When (and How) Will the Markets for Oil and Electricity Become Integrated? Econometric Evidence and Trends 1993-99, Working Paper, Norwegian University of Life Sciences.
Guth, L., Sepetys, K. (2001). Cash flow at risk for nonfinancial companies, Global Energy Business, June, 12-14. Haurie, A., Smeers, Y., Zaccour, A. (1992). Toward a contract portfolio management model for a gas producing firm, INFOR, 30, 257-273.
Huisman, R., Mahieu, R., Schlichter, F. (2007). Hedging exposure to electricity price risk in a value at risk framework, Erasmus Research Institute of Management Report Series No. ERS-2007-013-F&A
Kettunen, J., Salo, A., and Bunn, D.W. (2010). Optimization of Electricity Retailer's Contract Portfolio Subject to Risk Preferences, IEEE Transactions on Power Systems, 25(1), pp. 117-128
Knittel, C.R., Roberts, M.R. (2005). An empirical examination of restructured electricity prices, Energy Economics, 27, 791-817.
Krapels, N., (2000). Electricity Trading and Hedging, London: Risk Books.
Longstaff, F.A. Wang, A.W. (2004). Electricity Forward Prices: A High-Frequency Empirical Analysis. Journal of Finance, 59(4), 1877-1900.
Näsäkkälä, E., Keppo, J. (2005). Electricity load pattern hedging with static forward strategies, Managerial Finance, 31(6), 116-137.
Oum, Y., Oren, S., Deng, S. (2006). Hedging quantity risks with standard power options in a competitive wholesale electricity market, Naval Research Logistics, 53(7), 697-712
Rockafellar, R.T., Uryasev, S. (2002). Conditional Value at Risk for General Loss Distributions, Journal of Banking and Finance, 26, 1443-71.
Smith, J., Winkler, R. (2006). The optimizer’s curse: Skepticism and postdecision surprise in decision analysis, Management Science, 52(3), 311–322.
Unger, G., Luthi, H. (2002). Power Portfolio Optimization and the Importance of Operational Flexibility, Working Paper, ETH.
Woo, C.-K., Karimov, R. I., Horowitz, I. (2004). Managing electricity procurement cost and risk by a local distribution company, Energy Policy, 32, 635-645