Benchmarking of hydroelectric stochastic risk management models using financial indicators

N.A. Iliadis, M. V. Pereira, S. Granville, M. Finger, P.-A. Haldi, L.A. Barroso

IEEE Power & Energy Society General Meeting - IEEE PES GM 2006, Montreal (Canada). 18-22 June 2006

Summary:

The objective of this paper is to present the operating and hedging analysis of a hydroelectric system in a non-hydro dominated market using a specifically-developed tool for operating and contracting decisions. Hydropower companies are likely to face stochastic inflows, spot prices, and forward prices, during their operation. The objective of the tool is to maximize expected revenues from spot and forward market trading, considering suitable indicators of the company risk aversion. We benchmark the implemented risk indicator of required minimum revenues in the optimization tool using financial risk indicators, such as value at risk, conditional value at risk, and the risk premium of a utility function. This portfolio management problem, which includes physical and financial assets, is formulated as a stochastic revenue maximization problem under a specified risk aversion constraint. The company risk aversion is apprehended by penalizing reservoir operation and derivative instruments contracting decisions policies that lead to financial performances that are violating the required minimum revenues at the end of a predefined profit period. A hybrid stochastic dynamic programming (SDP)/stochastic dual dynamic programming (SDDP) formulation is adopted to solve this large-scale optimization problem.

Keywords: CvaR, dynamic programming, electricity financial risk indicators, hydropower, portfolio management, stochastic optimization, Utility function and VaR

DOI: https://doi.org/10.1109/PES.2006.1709283

Published in IEEE PES GM 2006, pp: 1-8, ISBN: 1-4244-0493-2

Publication date: 2006-06-18.

Citation:
N.A. Iliadis, M. V. Pereira, S. Granville, M. Finger, P.-A. Haldi, L.A. Barroso, Benchmarking of hydroelectric stochastic risk management models using financial indicators, IEEE Power & Energy Society General Meeting - IEEE PES GM 2006, Montreal (Canada). 18-22 June 2006. In: IEEE PES GM 2006: Conference proceedings, ISBN: 1-4244-0493-2