Gas Generation Portfolio Management Strategy Based on Financial Derivatives: Options

This paper presents a portfolio management strategy to apply the financial options, especially put options, to earn extra monetary benefits (i.e. the premium) during the idle hours of the gas generator in the electricity market and to hedge the risk of electricity price fluctuations. In this paper three broad categories of cases are evaluated, involving the conventional operation case that no options are utilized and the put options with/without energy storage devices. In the mathematic model of these three cases, the revenues and costs have been aggregated to calculate the risks and the returns. For the case with the energy storage devices, this paper takes power-to-gas (P2G) and battery storage into account. To determine the optimal weight of the P2G and the battery, they will be arranged into a portfolio by using the mean-variance theory. A simulation is established based on the data of four sequential years from 2015 to 2018 in the Australian electricity market. The results show that the application of the put options will facilitate gas generators to earn more profits each year. Besides, the storage devices are key factors that make the put options worthwhile.