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Short-term Hedging for an Electricity Retailer

A dynamic global hedging procedure making use of futures contracts is developed for a retailer of the electricity market facing price, load and basis risk. Statistical models reproducing stylized facts are developed for the electricity load, the day-ahead spot price and futures prices in the Nord Pool market. These models serve as input to the hedging algorithm, which also accounts for transaction fees. Back-tests with market data from 2007 to 2012 show that the global hedging procedure provides considerable risk reduction when compared to hedging benchmarks found in the literature.

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Energy Specializations: Electricity – Markets and Prices ; Electricity – Distributed Generation; Electricity – Local Distribution; Energy Investment and Finance – Corporate Strategy; Energy Investment and Finance – Public and Private Risks, Risk Management; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes: Q41: Energy: Demand and Supply; Prices, Q42: Alternative Energy Sources, D81: Criteria for Decision-Making under Risk and Uncertainty, C58: Financial Econometrics, G12: Asset Pricing; Trading Volume; Bond Interest Rates, C53: Forecasting Models; Simulation Methods

Keywords: Risk management, power markets, energy, load modeling, futures contracts

DOI: 10.5547/01956574.37.2.ddup

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Published in Volume 37, Number 2 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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