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Hedging strategies in energy markets: the case of electricity retailers

Boroumand, Raphaël Homayoun, Goutte, Stéphane, Porcher, Simon and Porcher, Thomas (2015) Hedging strategies in energy markets: the case of electricity retailers. Energy Economics, 51. pp. 503-509. ISSN 0140-9883

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Identification Number: 10.1016/j.eneco.2015.06.021

Abstract

As market intermediaries, electricity retailers buy electricity from the wholesale market or self-generate for re(sale) on the retail market. Electricity retailers are uncertain about how much electricity their residential customers will use at any time of the day until they actually turn switches on. While demand uncertainty is a common feature of all commodity markets, retailers generally rely on storage to manage demand uncertainty. On electricity markets, retailers are exposed to joint quantity and price risk on an hourly basis given the physical singularity of electricity as a commodity. In the literature on electricity markets, few articles deal on intra-day hedging portfolios to manage joint price and quantity risk whereas electricity markets are hourly markets. The contributions of the article are twofold. First, we define through a VaR and CVaR model optimal portfolios for specific hours (3 am, 6 am,. . . ,12 pm) based on electricity market data from 2001 to 2011 for the French market. We prove that the optimal hedging strategy differs depending on the cluster hour. Secondly, we demonstrate the significantly superior efficiency of intra-day hedging portfolios over daily (therefore weekly and yearly) portfolios. Over a decade (2001–2011), our results clearly show that the losses of an optimal daily portfolio are at least nine times higher than the losses of optimal intra-day portfolios.

Item Type: Article
Official URL: https://www.journals.elsevier.com/energy-economics
Additional Information: © 2015 Elsevier B.V.
Divisions: Management
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HD Industries. Land use. Labor
Sets: Departments > Management
Date Deposited: 30 Jun 2017 13:09
Last Modified: 20 Mar 2019 02:47
URI: http://eprints.lse.ac.uk/id/eprint/82976

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