Hedging Exposure to Electricity Price Risk in a Value at Risk Framework

17 Pages Posted: 7 Mar 2007  

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

F. Schlichter

affiliation not provided to SSRN

Date Written: February 21, 2007

Abstract

This paper deals with the question how an electricity end-consumer or distribution company should structure its portfolio with energy forward contracts. This paper introduces a one period framework to determine optimal positions in peak and off-peak contracts in order to purchase future consumption volume. In this framework, the end-consumer or distribution company is assumed to minimize expected costs of purchasing respecting an ex-ante risk limit defined in terms of Value at Risk. Based on prices from the German EEX market, it is shown that a risk-loving agent is able to obtain lower expected costs than for a risk-averse agent.

Keywords: Electricity prices, Forward risk premium, Hedge ratios, Mean variance

Suggested Citation

Huisman, Ronald and Mahieu, Ronald and Schlichter, F., Hedging Exposure to Electricity Price Risk in a Value at Risk Framework (February 21, 2007). ERIM Report Series Reference No. ERS-2007-013-F&A. Available at SSRN: https://ssrn.com/abstract=968855

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

F. Schlichter

affiliation not provided to SSRN

No Address Available

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