Deterministic and stochastic models for hedging electricity portfolio of a hydropower producer

A deterministic and a stochastic multi-stage portfolio model for a hydropower producer operating in a competitive electricity market is proposed. The producer has to cope with a production function constraint imposing the scheduling of his future production. The portfolio includes its own production, a set of energy contracts for delivery or purchase, including derivatives contracts as forwards with physical delivery to hedge against risks. The goal of our models is to maximise the profit of the producer and reduce the economic risks connected to the fact that energy spot and forward prices are highly volatile. We alternatively derive the forward price by the spot dynamics and model forward dynamics obtaining consistent scenarios. Our results show that forward contracts can be used for hedging purposes. Beyond profit, the convenience of using forward contracts is a more efficient use of the hydroplant, taking advantage of the possibility of pumping water and ending up with a higher final value of the reservoir. Finally, we provide performance measures of our threestage model with respect to deterministic one.