Financial risk management in a competitive electricity market

This paper proposes solutions for electricity producers in the field of financial risk management for electric energy contract evaluation. The efficient frontier is used as a tool to identify the preferred portfolio of contracts. Each portfolio has a probability density function for the profit. For important scheduling policies, closed form solutions are found for the amount of futures contracts that correspond to the efficient frontier. Production scheduling must consider resource constraints. It is found that, without resource constraints, the portfolio with the highest expected profit can be preferred-even for a risk-averse decision-maker. When resource constraints are present, portfolios not corresponding to the maximum expected profit criteria will more frequently be preferred.