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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:
D42 - Market Structure, Pricing, and Design: Monopoly
L94 - Electric Utilities
D44 - Auctions
D92 - Intertemporal Firm Choice: Investment, Capacity, and Financing
D81 - Criteria for Decision-Making under Risk and Uncertainty
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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 Quarterly Journal of the IAEE's Energy Economics Education Foundation.