Hedging Strategy and Electricity Contract Engineering - IFOR

2.5 Demand 19
2.5. Demand
Compared to primary fuels, such as coal and oil, electricity is clean and safe.
No waste is produced at the user’s end, since all pollution is borne by the
producer, not the end-user. Unlike most other fuels, which require storage and
processing, electricity is immediate available and easily controllable at point of
use. Precisely for these characteristics, electricity has become a fundamental
driver of our economy [Ku95] and electricity is needed by essentially all
sectors in the economy, from household to industry. There are generally
high costs associated with unserved energy and the value of lost load can for
some industries amount to tens of times the typical electricity price [WH97].
Demand is hence inelastic to price changes.
Demand of electricity exhibits seasonal fluctuations, which are essentially
driven by the climate. In Europe the demand-peak normally occurs in the
winter due to excessive heating. In other geographical regions, like California
demand peaks in the summer, since humidity and heat initiate extensive use
of air-conditioning. Electricity demand is not even uniform throughout the
day. Several electricity end-users are related to the time-of-day, like lighting,
cooking and use of computers. The hours of the day during which the highest
demand occurs is known as the peak period. The demand fluctuation with
a yearly periodicity is exemplified in Figure 2.4, where one can also see the
increasing demand over time. Electricity demand has throughout the world
been growing steady in the past and seems to be closely related with GNP
growth [Ku95], which in the developed world historically has been a few
percent per year in real terms. The demand fluctuations with a daily periodicity
can be seen in Figure 2.5, where the low demand during weekends, causing
a demand variation with a weekly frequency, is also conspicuous. This is a
typical pattern for electricity demand, due to the low industrial activity during
nights and weekends.
Extraordinary weather conditions can cause sudden and dramatic shocks to
the demand, which may increase substantial. The demand is typically falling
back to its normal level as soon as the underlying weather phenomenon is over.
Demand is normally well correlated with temperature and a rule of thumb in
Switzerland is that a temperature decrease of one degree Celsius, increases the