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 optimally allocate 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 (i) that it is typically not optimal to hedge a baseload consumption profile with a baseload forward contract and (ii) that, under reasonable assumptions, risk taking by the purchaser is rewarded by lower expected costs.

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doi.org/10.1016/j.eneco.2008.08.003, hdl.handle.net/1765/17982
ERIM Article Series (EAS)
Energy Economics
Erasmus Research Institute of Management

Huisman, R., Mahieu, R., & Schlichter, F. (2009). Electricity Portfolio Management: Optimal Peak / Off-Peak Allocations. Energy Economics, 31(1), 169–174. doi:10.1016/j.eneco.2008.08.003