Risk management in electricity market by portfolio optimization

Abstract

Though electricity is getting traded as a commodity, the price of power is more volatile than any other commodity. The price of power is controlled by many unseen and random market driven factors, such as load-demand variation, attitude of market players, fuel price variation, availability of resources etc. Due to this, market participants get exposed to price-risk and their profitability gets affected. Hence since more than a decade, risk management has become an essential task for electrify market participants. In case of conventional generation, oil, coals are the major fuels. The variability of fuel price affects the price of power. In this paper, the effect of variability of fuel price on risk is analyzed.The objective of this paper is to minimize the risk associated with fuel -price variation using portfolio optimization method. This paper explains the concept of efficient frontier, a key feature of portfolio theory and its application in fuel -price risk minimization. The results are analyzed for different combinations of fuels such as coal and oil considering two approaches: Monthly Efficient Frontier and Daily Efficient Frontier. The work suggests the approach of using daily price variation to obtain optimum portfolio.

An Agent-Based Two-Stage Trading Model for Direct Electricity Procurement of Large Consumers

“…Generation companies need to maximize revenues, whereas LCs need to minimize costs of participating in the market through direct electricity procurement. The research on portfolio optimization problems of GenCos has investigated different aspects, such as strategic bidding [15,16], risk management [17,18], and congestion charges [19]. For some LCs who have their own power plants with a small capacity, the optimal electricity procurement from the market with determined factors or uncertain information has been studied [20][21][22][23].…”