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Managing risk under a fixed price load following obligation for electricity service

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2 Author(s)
Shmuel S. Oren ; Department of Industrial Engineering and Operations Research, University of California at Berkeley, 94720, USA ; Yumi Oum

Load serving entities (LSE) and holders of default service obligations, in restructured electricity markets, provide electricity service at regulated or contracted fixed prices while facing wholesale procurement cost or opportunity cost at volatile spot prices. We address the hedging problem of such aentities which face joint price and quantity risk. Exploiting the correlation between consumption quantities and spot prices, we develope optimal, self financed hedging strategies under various assumptions regarding the uncertainty in wholesale price and consumption volume and under different models of risk aversion and hedging objectives. We then show how such strategies can be implemented using standard forward contracts and commodity derivatives.

Published in:

IEEE PES General Meeting

Date of Conference:

25-29 July 2010