Risk mitigation in the electricity market driven by new renewable energy sources

Abstract

An important indicator of supply and demand uncertainty on electricity markets is risk premium (RP), an integral part of electricity price. The level of RP is describing the risk the market actors expect in the future due to the market uncertainties. With the electricity market price behavior rapidly changing, the rising market supply uncertainty is increasing the volatility of RP. To better understand this behavior, power market participants need new models that will efficiently use the information available in the processes driving the electricity price and RP and to explain the influence of RES uncertainties on the future RP and electricity prices. A decade ago, researchers investigating RP focused primarily on the uncertainties arising from consumption forecast and generation outages. RES share in generation mix was small and its influence on uncertainty was negligible, leading to much lower volatilities of RP than today. With the increasing influence of RES, typically exhibiting variability on a sub-hourly level, traditional models using daily electricity price to calculate RP were becoming inadequate. In this dynamic period of electricity market transformation, this paper highlights the importance of RP signals to market actors. A stochastic method for RP calculation is discussed with the associated RP model, driven by the intraday dynamics. An example of the RP signal is presented on historical price data from the German electricity market, highlighting uncertainty pattern developed over the years. With such an approach, the market actors can adjust their trading strategies thus mitigating their market risk exposure.

Impact of COVID-19 on listed European electricity companies: a comparative analysis of investment in renewable and traditional electricity

“…Moreover, Koolen et al (2021) found that renewable energy technology oppositely affects the risk premium due to the heterogenous influence on risk-related hedging pressures of retailers and producers. Krecar and Gubina (2019) stated that, renewable energy increases market risk, influencing the trading and volatility. Finally, the relationship between financial markets and policy risks is an increasingly important factor for investors in this sector, since the effects of structural modifications, market reforms and new tools to address risk and return issues are essential to investors (Zhang and Farnoosh, 2019).…”

Towards Definition of the Risk Premium Function

“…risk management and trading. In the risk management, prospective energy companies would be focused on MC simulation results to quantify the value of possible loss in the worst-case scenario, [38].…”