Plain vanilla options for price-quantity hedging in the Colombian wholesale electricity market

摘要

This paper applies the conceptual framework of Oum, Oren and Deng (2006) to hedge against price and quantity fluctuations in spot electricity markets. Both price and quantities are usually correlated and price hedging is insufficient to cover the risks faced by load-serving firms supplying regulated customers. By maximizing a static expected utility problem subject to plausible constraints, an infinite collection of derivatives (" exotic option") emerges as the solution of both price and quantity hedging. This exotic option is approximated and calibrated with real data for the Colombian spot market. The approximation is designed as a portfolio composed by risk free bond, futures/forward contracts, 2 put and 3 call options with optimal strike prices, and it is applied to month-ahead and quarterly-ahead hedging during the peak hours. The approximation and time framework is carefully discussed from a market maker's perspective. The proposal addresses major problems such as lack of liquidity and anonymity of the current bilateral trading scheme. The analysis could be easily extended to non-regulated customers and to power generators.