Evaluation of Different Hedging Strategies for Commodity Price Risks of Industrial Cogeneration Plants

FCN Working Paper No. 2/2012

47 Pages Posted: 13 Nov 2013

See all articles by Andreas Palzer

Andreas Palzer

Fraunhofer Institute for Solar Energy Systems ISE - Division Thermal Systems and Buildings

Günther Westner

RWTH Aachen University - E.ON Energy Research Center

Reinhard Madlener

RWTH Aachen University

Date Written: March 1, 2013

Abstract

In this paper, we design and evaluate eight different strategies for hedging commodity price risks of industrial cogeneration plants. Price developments are parameterized based on EEX data from 2008-2011. The probability distributions derived are used to determine the value-at-risk (VaR) of the individual strategies, which are in a final step combined in a mean-variance portfolio analysis for determining the most efficient hedging strategy. We find that the strategy adopted can have a marked influence on the remaining price risk. Quarter futures are found to be particularly well suited for reducing market price risk. In contrast, spot trading of CO2 certificates is found to be preferable compared to forward market trading. Finally, portfolio optimization shows that a mix of various hedging strategies can further improve the profitability of a heat-based cogeneration plant.

Keywords: Commodity price risk, Cogeneration, Hedging, mean-variance portfolio optimization

JEL Classification: D22, D81, G11, G32, Q48

Suggested Citation

Palzer, Andreas and Westner, Günther and Madlener, Reinhard, Evaluation of Different Hedging Strategies for Commodity Price Risks of Industrial Cogeneration Plants (March 1, 2013). FCN Working Paper No. 2/2012. Available at SSRN: https://ssrn.com/abstract=2353322 or http://dx.doi.org/10.2139/ssrn.2353322

Andreas Palzer

Fraunhofer Institute for Solar Energy Systems ISE - Division Thermal Systems and Buildings ( email )

Heidenhofstraße 2
Freiburg, 79110
Germany

Günther Westner

RWTH Aachen University - E.ON Energy Research Center ( email )

Arnulfstrasse 56
Munich, 80335
Germany

Reinhard Madlener (Contact Author)

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustraße 10
Aachen, 52074
Germany
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)

HOME PAGE: http://www.eonerc.rwth-aachen.de/fcn

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