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.

Additional Metadata
Keywords electricity, electricity portfolio management, forward risk premiums, hedge ratio, optimal electricity sourcing
Persistent URL dx.doi.org/10.1016/j.eneco.2008.08.003, hdl.handle.net/1765/17982
Series ERIM Article Series (EAS)
Journal Energy Economics
Huisman, R, Mahieu, R.J, & 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