Medium-Term Risk Management for a Gas-Fired Power Plant

October 11, 2012 - 12:00pm
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  Electricity sectors in many countries have been deregulated with the aim of introducing competition. However, as a result, electricity prices have become highly volatile. Stochastic programming provides an appropriate method to characterise the uncertainty and to derive decisions while taking risk management into account. We consider the medium-term risk management problem of a UK gas-fired power plant that faces stochastic electricity and gas prices. In particular, the power plant makes daily decisions about electricity sales to and gas purchases from spot markets over a monthly time horizon in order to maximise its expected profit subject to operational and risk constraints. Representation of uncertainty is via scenarios, which are generated from time-series analysis of UK energy prices. Exposure to this uncertainty may be hedged via forward contracts for both electricity and gas transacted at the beginning of the month. Also, the correlation between energy prices constitutes a natural hedge against the risk of low profits, an effect that becomes less obvious with higher plant efficiency. In addition, operational flexibility is a way to manage the risk of low profits. Finally, we conclude that the fraction of electricity forward sales increases with plant efficiency and decreases with operational flexibility.

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