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Copula-Based Hedge Ratios for Renewable Power Generation

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Handbook of Risk Management in Energy Production and Trading

Part of the book series: International Series in Operations Research & Management Science ((ISOR,volume 199))

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Abstract

The electricity price and production volume determine the revenue of a renewable electricity producer. Feed-in variations to power plants and high price volatility result in significant cash flow uncertainty. A copula-based Monte Carlo model is used to relate price and production volume and to find optimal hedge ratios through minimization of risk measures such as variance, hedge effectiveness, cash flow at risk, and conditional cash flow at risk. In our case study, all risk measures argue for an optimal hedge ratio between 35 and 60% of expected production. The highest risk reduction is achieved by the use of forward contracts with long time to maturity but at the expense of a low risk premium. Conversely, short-term futures and forwards only provide marginal risk reduction, but can yield attractive positive risk premiums. These findings underline the importance of distinguishing the use of derivative contracts for speculation and hedging purposes, through positions in short-term and long-term contracts, respectively.

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Notes

  1. 1.

    Cash flow at risk and conditional cash flow at risk.

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Author information

Authors and Affiliations

  1. Department of Industrial Economics and Technology Management, Norwegian University of Science and Technology (NTNU), Trondheim, Norway

    Audun Nordtveit

  2. NTNU, Trondheim, Norway

    Kim T. Watle & Stein-Erik Fleten

Authors
  1. Audun Nordtveit
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  2. Kim T. Watle
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  3. Stein-Erik Fleten
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Corresponding author

Correspondence to Stein-Erik Fleten .

Editor information

Editors and Affiliations

  1. Department of Statistics & OR, University of Vienna, Wien, Austria

    Raimund M. Kovacevic

  2. Department of Statistics & OR, University of Vienna, Wien, Austria

    Georg Ch. Pflug

  3. Department of IT & Mathematical Methods, University of Bergamo, Dalmine, Bergamo, Italy

    Maria Teresa Vespucci

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Nordtveit, A., Watle, K.T., Fleten, SE. (2013). Copula-Based Hedge Ratios for Renewable Power Generation. In: Kovacevic, R., Pflug, G., Vespucci, M. (eds) Handbook of Risk Management in Energy Production and Trading. International Series in Operations Research & Management Science, vol 199. Springer, Boston, MA. https://doi.org/10.1007/978-1-4614-9035-7_13

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