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

17 Pages Posted: 7 Mar 2007

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

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 J. 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

Register to save articles to
your library

Register

Paper statistics

Downloads
350
rank
83,475
Abstract Views
1,201
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information