Hedging Strategy and Electricity Contract Engineering - IFOR

Chapter 7
Case study
In this chapter a portfolio of a typical Swiss utility is studied, where the
production park consists of a few nuclear plants and a number of hydro
storage plants, whereof some are also equipped with pumps. On the short side,
the utility has sold a number of swing option contracts. The utility has the
possibility to trade in the spot and futures market. As known from Chapter 4,
the dispatch of a nuclear plant is trivial and the corresponding contracts is a
series of futures. Hence we will not model the nuclear plants and the focus will
rather be on the hydro storage plants. These plants are however only modeled
on an aggregated level by a super hydro storage plant, where the characteristics
of each hydro storage plant, such as inflow, dam size and turbine capacity is
summed up. We will hence get no guidance on which specific hydro storage
plant to dispatch, but rather how we on a portfolio level should dispatch. We
could model each hydro storage plant individually, however at the costs of an
increased problem size.
A time horizon of two weeks is chosen, which corresponds to 336 hourly
periods. We are standing at the beginning of a hydrological year, with the first
period being the first hour of a Monday in the beginning of October.
The short positions in the swing option contracts are due to illiquidity assumed
to be long term in the sense that they cannot be changed within the short
horizon.