Operation , Investment and Hedging in Electricity Markets

This paper develops hedging strategies for an electricity distributor in the Nordic electricity market who manages price and volume risk from fixed price agreements on stochastic electricity load. Whereas the distributor trades in the spot market at area prices, the financial contracts used for hedging are settled against the system price. Both the area price and the system price are correlated with electricity load and due to congestion, price differences are also correlated with load. This correlation structure is often disregarded in practice. We, therefore, develop a model for the area price, the system price and the load in the Nordic market with an optimal hedging strategy that coincide with common practice in the industry. This serves as benchmark for an extended model using data from 2013 and 2014 for two bidding areas. In one area the improved hedging strategy reduces gross loss by 5.8% and increases gross profit by 3.8%. In the other area gross loss is reduced by 13.6% and gross profit is increased by 9.5%. 2.