Cross hedging and forward-contract pricing of electricity

Chi Keung WOO, Ira HOROWITZ, Khoa HOANG

Research output: Contribution to journalArticle

39 Citations (Scopus)

Abstract

We consider the problem of an electric-power marketer offering a fixed-price forward contract to provide electricity that it purchases from a potentially volatile and unpredictable fledgling spot energy market. One option for the risk-averse marketer who wants to hedge against the spot-price volatility is to engage in cross hedging to reduce the contract's profit variance, and to determine the forward-contract price as a risk-adjusted price - the sum of a baseline price and a risk premium. We show how the marketer can estimate the spot-price relationship between two wholesale energy markets for the purpose of cross hedging, as well as the optimal hedge and the forward contract's baseline price and risk premium. Copyright © 2001 Elsevier Science B.V. All rights reserved.
Original languageEnglish
Pages (from-to)1-15
JournalEnergy Economics
Volume23
Issue number1
DOIs
Publication statusPublished - Jan 2001

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Electricity
Costs
Profitability
Pricing
Marketers
Forward contracts
Cross-hedging
Risk premium
Energy market
Spot price
Hedge
Risk-averse
Price volatility
Fixed price
Price premium
Profit
Purchase
Electric power

Citation

Woo, C.-K., Horowitz, I., & Hoang, K. (2001). Cross hedging and forward-contract pricing of electricity. Energy Economics, 23(1), 1-15. doi: 10.1016/S0140-9883(00)00071-2

Keywords

  • Cross hedging
  • Forward-contract pricing
  • Electricity