Optimal Involvement in Futures Markets of a Power Producer

TLDR

The study seeks to determine the optimal futures market strategy for a power producer to hedge against pool price volatility. The authors model the problem as a one‑year stochastic programming with recourse, formulating a large‑scale mixed‑integer linear program that incorporates CVaR risk and uses scenario reduction to remain tractable. A realistic case study demonstrates the effectiveness of the proposed approach and yields conclusions on optimal futures participation.

Abstract

This paper addresses the optimal involvement in a futures electricity market of a power producer to hedge against the risk of pool price volatility. The considered trading horizon spans one whole year. Recognizing the highly uncertain nature of future pool prices, a stochastic programming framework with recourse is used to model this decision-making problem. The resulting problem is a large scale mixed-integer linear programming problem. Scenario reduction techniques are used to make this problem tractable. Risk is properly modeled using the CVaR methodology. Results from a realistic case study are provided and analyzed. Some conclusions are finally drawn.