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Setting Up Standard Power Options to Hedge Price-Quantity Risk in a Competitive Electricity Market: The Colombian Case

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4 Author(s)
Sanchez, G.A.V. ; Dept. of Electr. Eng., Univ. de los Andes, Bogota, Colombia ; Alzate, J.M. ; Cadena, A.I. ; Benavides, J.M.

This paper applies the conceptual framework applied in the work of Oum et al. to hedge retailers against price-quantity fluctuations in spot electricity markets, and extends it to power generators, in order to design suitable power options with optimal strike prices from a market maker's perspective. These options are then used to hedge agents against price and quantity fluctuations by maximizing a static expected utility problem. An infinite collection of derivatives (“exotic option”) emerges as the solution of both price and quantity hedging. This exotic option is approximated with a portfolio composed by bonds, forward/futures contracts, and a fixed number of put and call options, employing a plausible replicating strategy. The theoretical framework is tested within the context of the Colombian power market, and is applied to month-ahead and quarterly-ahead hedging during on-peak hours. The proposal addresses major problems such as lack of liquidity and anonymity of the current bilateral electricity trading scheme in Colombia.

Published in:

Power Systems, IEEE Transactions on  (Volume:26 ,  Issue: 3 )

Date of Publication:

Aug. 2011

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