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Risk minimisation: the failure of electricity intra-day forward contracts

Author

Listed:
  • Raphael Homayoun Boroumand
  • Stéphane Goutte

    (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique)

  • Simon Porcher

    (IAE - Institut d'Administration des Entreprises)

  • Thomas Porcher

    (ESG Research Lab - ESG Management School)

Abstract
As market intermediaries, electricity retailers purchase electricity from the wholesale market or self-generate to 'deliver' to their customers. However, electricity retailers are uncertain about how much electricity their residential customers will use at any moment of the day until the customers actually turn on their switches. While demand uncertainty is a common feature of all commodity markets, retailers generally rely on storage to manage it. Individually, electricity retailers are exposed to joint volumetric and price risk on an hourly basis given the physical attributes of electricity. In the literature on electricity markets, few articles compare the efficiency of forward contracts, options and physical assets (i.e., power plants) within intra-day hourly hedging portfolios, while electricity markets are precisely hourly markets. We analyse portfolios composed of forward contracts and/or power plants for specific hourly clusters based on electricity market data from 2013 to 2015 from the integrated German-Austrian spot market. Using a VaR and CVaR model, we prove that intra-day hedging with forward contracts is structurally inefficient compared to financial options and physical assets, no matter the cluster hour.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Raphael Homayoun Boroumand & Stéphane Goutte & Simon Porcher & Thomas Porcher, 2017. "Risk minimisation: the failure of electricity intra-day forward contracts," Post-Print hal-02145820, HAL.
    • Handle: RePEc:hal:journl:hal-02145820
    DOI: 10.1504/IJGEI.2017.086847
    as

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