Integrated risk management of hydro power scheduling and contract management

The paper describes the implementation of a new integrated tool for risk management in hydropower systems. Earlier practice in Scandinavia has been to separate operations scheduling and contract management. In the present approach operation scheduling and hedging by future contacts are integrated in one model. The risk level is controlled by setting revenue targets. Revenues below target are penalized; this implicitly defines a revenue utility function to reduce risk. The possibility of dynamically changing the future contract portfolio is now represented. The resulting large stochastic dynamic optimization problem is solved using a combination of stochastic dynamic programming and stochastic dual dynamic programming. Simulations for a test case show that the profit in the lower range is considerably improved with the new tool. The approach can be useful for hydropower companies that face price risks in addition to the inflow uncertainty, as is the case in a deregulated system.