This paper answers the question: what should a small load serving entity (LSE) use to hedge its procurement cost risk? In doing so, it proposes a transparent process to compute a hedging strategy's procurement cost expectations and ceilings. Its key finding is that if the LSE is risk averse, it should use electricity forwards when the forward price premium is relatively small and cross hedging with natural gas futures is relatively ineffective. Copyright © 2019 Elsevier Inc. All rights reserved.
CitationChait, M., Horii, B., Orans, R., & Woo, C. K. (2019). What should a small load serving entity use to hedge its procurement cost risk? The Electricity Journal, 32(3), 11-14. doi: 10.1016/j.tej.2019.02.006
- Procurement cost expectations
- Procurement cost risks
- Natural gas futures
- Electricity forwards
- Risk management