Intelligent management and hedging strategy on energy contracts in competitive electricity markets

The new environment of deregulated electricity markets presents new challenges to the financial risk management of power systems. Market participants have engaged in financial instrument trading for risk management purposes by means of specialized contracts, over the counter (OTC) instruments and exchange-based trading. In competitive electricity markets, market participants are exposed to price risk, volume risk, as well as other risks such as credit risk. These risks can be managed through an adequate portfolio of contracts. Therefore, it is expected that contract engineering will play a significant role in the future power markets. In this paper, a new concept that applies the modern portfolio theory to determine the optimal power contract portfolio strategy has been proposed. The strategy analysis under British Electricity Trading and Transmission Arrangements (BETTA), the UK power market, has been implemented as an example of power contract portfolio. The results indicate the traditional financial theory could apply to the risk management of power contract.