The efficient frontier for spot and forward purchases: An application to electricity

Chi Keung WOO, I. HOROWITZ, B. HORII, R. I. KARIMOV

Research output: Contribution to journalArticles

Abstract

A local electricity distribution company (LDC) can reduce its exposure to the inherent risks of spot-price volatility and uncertain future demand via forward contracts. Management's problem is to determine the optimal forward-contract purchase. We propose a practical three-stage approach for dealing with the problem. The first stage determines art optimal purchase by solving a cost-constrained risk-minimization problem. The second stage derives the efficient frontier of tradeoffs between expected cost and cost risk from the first-stage solution, at various bounds on the expected cost. The optimal solution is found by melding the frontier with management's risk preferences. In the third stage, the model's parameters are estimated from data typically available to an LDC and used to determine its forward-contract purchase. Copyright © 2004 Operational Research Society Ltd. All rights reserved.
Original languageEnglish
Pages (from-to)1130-1136
JournalJournal of the Operational Research Society
Volume55
Issue number11
DOIs
Publication statusPublished - Nov 2004

Citation

Woo, C.-K., Horowitz, I., Horii, B., & Karimov, R. I. (2004). The efficient frontier for spot and forward purchases: An application to electricity. Journal of the Operational Research Society, 55(11), 1130-1136. doi: 10.1057/palgrave.jors.2601769

Keywords

  • Electricity
  • Risk
  • Decision analysis
  • Nonlinear programming

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