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Hedging strategies in energy markets: The case of electricity retailers

Author

Listed:
  • Raphaël Homayoun Boroumand

    (ESG Research Lab - ESG Management School, City University London)

  • Stéphane Goutte

    (BF - Banque-Finance - LED - Laboratoire d'Economie Dionysien - UP8 - Université Paris 8 Vincennes-Saint-Denis)

  • Simon Porcher

    (LSE - Department Mathematics [London] - LSE - London School of Economics and Political Science)

  • Thomas Porcher

    (ESG Research Lab - ESG Management School)

Abstract
As market intermediaries, electricity retailers buy electricity from the wholesale market or self generate for re(sale) on the retail market. Electricity retailers are uncertain about how much electricity their residential customers will use at any time of the day until they actually turn switches on. While demand uncertainty is a common feature of all commodity markets, retailers generally rely on storage to manage demand uncertainty. On electricity markets, retailers are exposed to joint quantity and price risk on an hourly basis given the physical singularity of electricity as a commodity. In the literature on electricity markets, few articles deals on intra-day hedging portfolios to manage joint price and quantity risk whereas electricity markets are hourly markets. The contributions of the article are twofold. First, we define through a VaR and CVaR model optimal portfolios for specific hours (3am, 6am,. .. ,12pm) based on electricity market data from 2001 to 2011 for the French market. We prove that the optimal hedging strategy differs depending on the cluster hour. Secondly, we demonstrate the significantly superior efficiency of intra-day hedging portfolios over daily (therefore weekly and yearly) portfolios. Over a decade (2001-2011), our results

Suggested Citation

  • Raphaël Homayoun Boroumand & Stéphane Goutte & Simon Porcher & Thomas Porcher, 2015. "Hedging strategies in energy markets: The case of electricity retailers," Post-Print halshs-01194750, HAL.
    • Handle: RePEc:hal:journl:halshs-01194750
    DOI: 10.1016/j.eneco.2015.06.021
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01194750
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    References listed on IDEAS

    as
    1. St'ephane Goutte & Nadia Oudjane & Francesco Russo, 2013. "Variance optimal hedging for continuous time additive processes and applications," Papers 1302.1965, arXiv.org.
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    5. Chemla, Gilles & Touzi, Nizar & Aïd, René & Porchet, Arnaud, 2011. "Hedging and Vertical Integration in Electricity Markets," CEPR Discussion Papers 8313, C.E.P.R. Discussion Papers.
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    9. St'ephane Goutte & Nadia Oudjane & Francesco Russo, 2012. "Variance Optimal Hedging for discrete time processes with independent increments. Application to Electricity Markets," Papers 1205.4089, arXiv.org.
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    More about this item

    Keywords

    Retailer; Electricity; Risk; Hedging; Portfolio; Intra-day; VaR; CVaR;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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