Comparing Hedging Methods for Wind Power: Using Pumped Storage Hydro Units vs. Options Purchasing

The main setback for wind energy is the uncertainty and uncontrollability of the energy source. Researchers are trying to create ways to handle this uncertainty by means of energy storage through pumped storage hydro facilities, compressed air facilities, etc. This paper will analyze the option of using a pumped storage hydro plant to negate this uncertainty from a financial viewpoint. In addition, this paper analyzes whether or not such an option is truly best by comparing it to the case where the wind farm can purchase call/put options to protect against the uncertainty of the wind. To determine the proper price of these options, the Black-Scholes options pricing model is used to ensure there is no ability to arbitrage, i.e. there is no free lunch. This second option will also consider the pumped storage plant's financial gain when working independent as well in order to make a fair comparison. The objective of this paper is to analyze the effectiveness of these hedging methods and the financial implications