Output-Hedging of Electric Utility Firms: The Role of Electricity Derivatives Markets

48 Pages Posted: 9 Jan 2018 Last revised: 6 Mar 2018

Markus Hang

University of Augsburg - Institute of Materials Resource Management

Jerome Geyer-Klingeberg

University of Augsburg - Institute of Materials Resource Management

Andreas Rathgeber

University of Augsburg - Institute of Materials Resource Management

Clemence Alasseur

Électricité de France (EDF)

Lena Wichmann

University of Augsburg - Institute of Materials Resource Management

Date Written: January 5, 2018

Abstract

Recent introductions of electricity derivatives markets create a unique setting for the analysis of output hedging of electric utility firms. We directly consult these financial innovations as a new measure of corporate hedging. In contrast to prior research focusing on endogenous variation in hedging behavior, this approach allows analyzing hedging as an exogenous event in order to overcome endogeneity problems. Based on a set of 16 events, the hedging behavior, the risk exposures, financing and investment decisions, and firm values are analyzed based on a sample of 159 firms form 40 countries for the years 2005–2015. The results show that the availability of electricity derivatives supports the decision to hedge and enables a firm to reduce its hedging volumes by substituting other hedging positions. Furthermore, electricity derivatives have a major impact on a firms diverse risk exposures. Additionally, electricity hedging significantly increases a firm’s debt capacity and investment expenditure. Surprisingly, electricity hedging has no firm value effect. Overall, the access to electricity derivatives markets is identified as a crucial country-level determinant for corporate hedging of electric utility firms. The results are highly relevant for electric utility firms, but also for market operators and policy makers.

Keywords: Corporate Hedging, Output Hedging, Electricity Derivatives, Electric Utility Firms

JEL Classification: G32, G38, L94

Suggested Citation

Hang, Markus and Geyer-Klingeberg, Jerome and Rathgeber, Andreas and Alasseur, Clemence and Wichmann, Lena, Output-Hedging of Electric Utility Firms: The Role of Electricity Derivatives Markets (January 5, 2018). Available at SSRN: https://ssrn.com/abstract=3092157 or http://dx.doi.org/10.2139/ssrn.3092157

Markus Hang (Contact Author)

University of Augsburg - Institute of Materials Resource Management ( email )

Augsburg, 86159
Germany

Jerome Geyer-Klingeberg

University of Augsburg - Institute of Materials Resource Management ( email )

University of Augsburg
Universitätsstr. 2
Augsburg, 86159
Germany
(+49) 821 598-3046 (Phone)

Andreas Rathgeber

University of Augsburg - Institute of Materials Resource Management ( email )

Augsburg, 86159
Germany

Clemence Alasseur

Électricité de France (EDF) ( email )

Paris
France

Lena Wichmann

University of Augsburg - Institute of Materials Resource Management ( email )

Augsburg, 86159
Germany

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