Volumetric hedging in electricity procurement

Load serving entities (LSE) providing electricity service at regulated prices in restructured electricity markets, face price and quantity risk. We address the hedging problem of such a risk averse LSE. Exploiting the correlation between consumption quantities and spot prices, we developed an optimal, zero-cost hedging function characterized by payoff as function of spot price. We then show how such a hedging strategy can be implemented through a portfolio of call and put options.