Electricity Portfolio Management: Optimal Peak / Off-Peak Allocations
2007-12-07
Research Paper
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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.
- G3 : Corporate Finance and Governance
- M : Business Administration and Business Economics; Marketing; Accounting
- contract
- price
- market
- electricity
- off-peak
- purchaser
- day-ahead
- risk appetite
- portfolio
- day-ahead market
- appetite
- volume
- consumption
- baseload
- delivery
- day t
- day-ahead prices
- allocation
- premium
- ronald
