Risk constrained trading strategies for stochastic generation with a single-price balancing market

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Abstract

Trading energy from wind and other forms of stochastic generation in competitive electricity markets is challenging due to the limited predictability of these resources. This paper examines the specific case of single-price balancing markets and derives risk-constrained strategies in a probabilistic framework, going beyond the trivial zero/max solution, which would have participants offer either zero or their maximum energy production based on a prediction of whether the system will be in net up- or down-regulation. The zero/max approach is unacceptable in reality as it exposes the participant to potentially huge imbalance charges, and would violate price taker assumption for a portfolio of significant size. Here, we propose a number of trading strategies that control risk by hedging against penalising balancing prices in favour of rewarding ones by contracting forecast generation plus some adjustment. These strategies are formulated in a probabilistic framework in order to address the presence of forecast uncertainty and asymmetric costs in balancing markets. A case study using data from the Great Britain electricity market is presented and it is shown that the proposed strategies are able to simultaneously increase revenue and reduce risk using risk-constrained strategies. Furthermore, the required forecasts of electricity prices and system length are produced using standard tools and widely available explanatory information and are found to have sufficient skill to increase revenue compared to not hedging.
Original languageEnglish
Article number1345
Number of pages17
JournalEnergies
Volume11
Issue number6
DOIs
Publication statusPublished - 25 May 2018

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Trading Strategies
Balancing
Forecast
Electricity Market
Hedging
Zero
Predictability
Violate
Energy
Electricity
Adjustment
Trivial
Charge
Sufficient
Uncertainty
Resources
Market
Strategy
Prediction
Costs

Keywords

  • energy trading
  • risk
  • electricity markets
  • stochastic generation

Cite this

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Risk constrained trading strategies for stochastic generation with a single-price balancing market. / Browell, Jethro.

In: Energies, Vol. 11, No. 6, 1345, 25.05.2018.

Research output: Contribution to journalArticle

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AB - Trading energy from wind and other forms of stochastic generation in competitive electricity markets is challenging due to the limited predictability of these resources. This paper examines the specific case of single-price balancing markets and derives risk-constrained strategies in a probabilistic framework, going beyond the trivial zero/max solution, which would have participants offer either zero or their maximum energy production based on a prediction of whether the system will be in net up- or down-regulation. The zero/max approach is unacceptable in reality as it exposes the participant to potentially huge imbalance charges, and would violate price taker assumption for a portfolio of significant size. Here, we propose a number of trading strategies that control risk by hedging against penalising balancing prices in favour of rewarding ones by contracting forecast generation plus some adjustment. These strategies are formulated in a probabilistic framework in order to address the presence of forecast uncertainty and asymmetric costs in balancing markets. A case study using data from the Great Britain electricity market is presented and it is shown that the proposed strategies are able to simultaneously increase revenue and reduce risk using risk-constrained strategies. Furthermore, the required forecasts of electricity prices and system length are produced using standard tools and widely available explanatory information and are found to have sufficient skill to increase revenue compared to not hedging.

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