Managing the financial risks of electricity producers using options

Electricity producers participating in electricity markets face risks pertaining to both selling prices and the availability of the production units. Among electricity derivatives, options represent an adequate instrument to manage these risks. In this paper, we propose a multi-stage stochastic model to determine the optimal selling strategy of a risk-averse electricity producer including options, forward contracts, and pool trading. A detailed case study highlights the advantages of an option vs. a forward contract to hedge against the financial risks related to pool prices and unexpected unit failures.

► In this study we model European put options to sell electricity within a multi-stage stochastic framework. ► We analyze how options can be used by electricity producers to reduce both price and availability risks. ► The proposed model is tested in a real-world case study based on the EEX electricity market.