Title: Optimization of Electricity Retailer's Contract Portfolio Subject to Risk Preferences

Authors: Janne Kettunen, Ahti Salo and Derek W. Bunn

Status: IEEE Transactions on Power Systems, Vol. 25 (2010), No. 1, pp. 117-128

Keywords: Electricity market, retailer's contract portfolio optimization, risk management, stochastic optimization

When an electricity retailer faces volume risk in meeting load and spot price risk in purchasing from the wholesale market, conventional risk management optimization methods can be quite inefficient. For the management of an electricity contract portfolio in this context, we develop a multistage stochastic optimization approach which accounts for the uncertainties of both electricity prices and loads, and which permits the specification of conditional-value-at-risk requirements to optimize hedging across intermediate stages in the planning horizons. Our experimental results, based on real data from Nordpool, suggest that the modeling of price and load correlations is particularly important. The sensitivity analysis is extended to characterize the behavior of retailers with different risk attitudes. Thus, we observe that a risk neutral retailer is more susceptible to price-related than load-related uncertainties in terms of the expected cost of satisfying the load, and that a risk averse retailer is especially sensitive to the drivers of the forward risk premium.