Electricity purchasers manage a portfolio of contracts in order to purchase the expected future electricity consumption profile of a company or a pool of clients. This paper proposes a mean-variance framework to address the concept of structuring the portfolio and focuses on how to allocate optimal positions in peak and off-peak forward contracts. It is shown that the optimal allocations are based on the difference in risk premiums per unit of day-ahead risk as a measure of relative costs of hedging risk in the day-ahead markets. The outcomes of the model are then applied to show 1) whether it is optimal to purchase a baseload consumption profile with a baseload forward contract and 2) that, under reasonable assumptions, risk taking by the purchaser is rewarded by lower expected costs.

Additional Metadata
Keywords G11, electricity portfolio management, forward risk premiums, hedge ratio, optimal electricity sourcing
Publisher Erasmus Research Institute of Management (ERIM)
Persistent URL hdl.handle.net/1765/10775
Citation
Huisman, R., Mahieu, R.J., & Schlichter, F.. (2007). Electricity Portfolio Management: Optimal Peak / Off-Peak Allocations (No. ERS-2007-089-F&A). ERIM report series research in management Erasmus Research Institute of Management. Erasmus Research Institute of Management (ERIM). Retrieved from http://hdl.handle.net/1765/10775