17 Pages Posted: 7 Mar 2007
Date Written: February 21, 2007
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: 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
By Carl Ullrich