Risk hedging strategies for electricity retailers using insurance and strangle weather derivatives. (January 2022)

• Record Type: Journal Article
• Authors: Lai, Shuying; Qiu, Jing; Tao, Yuechuan; Liu, Yinyan
• Is Part Of: International journal of electrical power & energy systems. Volume 134(2022)
• Publication Date: 2022-01
• Subjects: Electricity markets -- Adjusted risk valuation method -- Strangle weather derivatives -- Risk management -- Energy storage system; Electrical engineering -- Periodicals; Electric power systems -- Periodicals; Électrotechnique -- Périodiques; Réseaux électriques (Énergie) -- Périodiques; Electric power systems; Electrical engineering; Periodicals; 621.3
• DOI: 10.1016/j.ijepes.2021.107372
• Languages: English
• ISSNs: 0142-0615

Abstract

Highlights: Both power shortage and demand fluctuation risks of the energy retailer are hedged. The effectiveness of insurance is improved via the adjusted risk valuation method. Strangle weather derivatives are proposed to hedge the risk of demand fluctuation. Budget constraint is considered to optimize the portfolio of hedging strategies. Abstract: With the increase of extreme weather events and the penetration of distributed energy resources, electricity retailers will encounter more risks at both transmission and distribution levels during the business operation process. For risks at the transmission level, huge damages to the transmission lines and towers caused by extreme events, like bushfires, ice storms, and flooding, will lead to power shortage. For risks at the distribution level, demand variations in accordance with temperature change will result in energy procurement difficulty for the retailers. In this paper, besides the normal bilateral contract, the insurance, the strangle weather derivatives, and the energy storage system are implemented to hedge the risks at both the transmission and distribution levels. Simulation results show that the proposed model ensures higher profits for the retailers in summer and winter compared to the conventional model when there are no extreme events occurring. When there are extreme events in both summer and winter, the proposed model incurs lower reduction of profits than that of the conventional model. In brief, the overall profits of the retailer using the proposed hedging model are higher than the convention model, and the overall profit variation of the conventional model is about 26% higher than the proposed model. Furthermore, when the budget of the retailer is sufficient, all three hedging tools can be invested. Whereas when the budget of the retailer is limited, the investment order should be insurance the first, strangle weather derivatives the second, and energy storage system the third.