A model for hedging load and price risk in the Texas electricity market

Michael Coulon, Warren Buckler Powell, Kaushik Ronnie Sircar

Research output: Contribution to journalArticle

24 Scopus citations

Abstract

Energy companies with commitments to meet customers' daily electricity demands face the problem of hedging load and price risk. We propose a joint model for load and price dynamics, which is motivated by the goal of facilitating optimal hedging decisions, while also intuitively capturing the key features of the electricity market. Driven by three stochastic factors including the load process, our power price model allows for the calculation of closed-form pricing formulas for forwards and some options, products often used for hedging purposes. Making use of these results, we illustrate in a simple example the hedging benefit of these instruments, while also evaluating the performance of the model when fitted to the Texas electricity market.

Original languageEnglish (US)
Pages (from-to)976-988
Number of pages13
JournalEnergy Economics
Volume40
DOIs
StatePublished - Nov 2013

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Energy(all)

Keywords

  • C60
  • C80
  • Electricity market
  • Forward prices
  • G12
  • G13
  • Hedging
  • Q40
  • Spikes
  • Spread options
  • Structural model

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