Electricity Portfolio Management: Optimal Peak / Off-Peak Allocations

25 Pages Posted: 29 Jan 2008

See all articles by Ronald Huisman

Ronald Huisman

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Ronald Mahieu

Tilburg University - Center for Economic Research, Econometrics and Finance Group; TiasNimbas Business School

Felix Schlichter

Erasmus University Rotterdam (EUR) - Department of Financial Management

Date Written: July 2007, 12

Abstract

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 allocate optimal 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 1) whether it is optimal to purchase a baseload consumption profile with a baseload forward contract and 2) that, under reasonable assumptions, risk taking by the purchaser is rewarded by lower expected costs.

Keywords: optimal electricity sourcing, hedge ratio, forward risk premiums, electricity portfolio management, G11

JEL Classification: G3, M

Suggested Citation

Huisman, Ronald and Mahieu, Ronald J. and Schlichter, Felix, Electricity Portfolio Management: Optimal Peak / Off-Peak Allocations (July 2007, 12). ERIM Report Series Reference No. ERS-2007-089-F&A. Available at SSRN: https://ssrn.com/abstract=1088214

Ronald Huisman (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Ronald J. Mahieu

Tilburg University - Center for Economic Research, Econometrics and Finance Group ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2430 (Phone)
+31 13 466 3280 (Fax)

HOME PAGE: http://center.uvt.nl/staff/mahieu/

TiasNimbas Business School ( email )

Warandelaan 2
Tilburg, North-Brabant 5071HS
Netherlands

Felix Schlichter

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

PO Box 1738
Rotterdam, 3000 DR
Netherlands

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