Obligations And Contracts Pineda Pdf 24: Master the Concepts of Prestation, Vinculum Juris, and Caus

As a consequence of competition in electricity markets, a wide variety of financial derivatives have emerged to allow market agents to hedge against risks. Electricity options and forward contracts constitute adequate instruments to manage the financial risks pertaining to price volatility or unexpected unit failures faced by power producers. A multi-stage stochastic model is described in this tutorial paper to determine the optimal forward and option contracting decisions for a risk-averse power producer. The key features of electricity options to reduce both price and availability risks are illustrated by using two examples.

Obligations And Contracts Pineda Pdf 24

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Electricity derivatives aiming at controlling the exposure of market agents to different types of risk have emerged in the restructured electricity industry [3]. These financial derivatives contribute to both share and reduce undesired risks through appropriate hedging strategies. Particularly, forward contracts are relevant derivatives within electricity markets. Forward contracts are agreements to buy/sell a fixed amount of electricity at a given price throughout a certain time interval in the future. Selling electricity through a forward contract at a fixed price allows power producers to hedge against the risk related to the volatility of pool prices [4].

Therefore, while reducing price risk, the acquisition of forward contracts to sell the electricity generated by a power producer increases the probability of suffering financial losses due to unexpected unit shutdowns. This risk is referred to as availability risk. Determining the optimal quantity of forward contracts to be acquired by a risk-averse power producer, taking into account the uncertainty related to both electricity pool prices and generating unit availability, is not a straightforward task [5]. Additionally, a power producer may opt for acquiring an insurance contract against unit failures [6]. Unlike forward contracts, whose main objective is to reduce the price risk faced by power producers, this type of financial product is aimed at limiting the financial losses incurred as a consequence of an unexpected outage of any of the production units owned by the power producer. Therefore, this type of contract reduces specifically the availability risk faced by power producers in exchange for a fix premium.

Previous research works pertaining to futures markets include the ones below. Reference [7] discussed the development of an option market for electricity trading. Reference [8] showed that options reduce the price risk and allow market participants to increase their potential profits. Since electricity cannot be stored, the well-known Black-Scholes equation [9] is not generally an appropriate method for pricing electricity derivatives. In this context, [10] proposed a heuristic algorithm to appraise electricity options. References [11] and [12] studied the impact of options and forward contracts on the offering strategies of electricity market agents. References [13] and [14] discussed the possibility of mitigating the risks faced by retailers using electricity options. The use of an option to buy electricity by large consumers to hedge against price increases was explored in [15]. Reference [16] dealt with the design of forward contracts bundled with financial options for electricity risk management. Reference [17] proposed a model to use electricity options for demand-side management. An analytical framework for the valuation of option contracts for physical delivery that enable risk-sharing among market participants is developed in [18]. The valuation of a rich family of electricity swing options is carried out in [19] and [20]. Additionally, some relevant references that study real options in electricity markets are shown in [21] and [22].

In this paper, we describe electricity options as instruments to manage the two main risks faced by power producers: price and production-availability risks. For this purpose, we describe a multi-stage stochastic programming model that enables a risk-averse power producer to decide its optimal portfolio of forward contracts and options taking into account the pool price volatility and its forced outage rate.

Secondly, we analyze how a call option to buy electricity reduces the availability risk of power producers. Considering that a power producer has signed a forward contract to sell electricity and a call option to have the right to buy electricity during the same delivery period. In that case, if the generating unit owned by the producer fails just before the delivery period of both contracts and the pool price is expected to be high, the producer can exercise the call option to buy electricity. This way, the producer can comply with its contracting selling obligation by buying the electricity through the call option at the strike price, which will be probably lower than the average pool price during the delivery period. On the other hand, if either the generating unit does not fail or the pool prices are expected to decrease below the strike price, the call option is not exercised.

The two situations above are representative of how options can be used to reduce both the price and the availability risks faced by power producers. Note, however, that the flexibility provided by options involves the payment of the option price, which has to be paid by the producer regardless of whether or not the option is exercised. Therefore, a power producer has to decide, the acquisition of a put/call option given its strike and option prices according to the pool price variability, its availability parameters and risk aversion level. Note also that while forward contracts and insurances are derivatives that reduce either the price or the availability risk, respectively, electricity options are financial derivatives that can be used by power producers to hedge against both price and availability risk.

The power producer can sell its production in the pool at volatile prices, or at fixed prices through forward contracts or options in the future market. For the sake of clarity, the arbitrage between these markets is avoided in the proposed model.

Note that the expected profit improvement achieved by the producer if the option is acquired is due to two reasons. The first reason is the fact that, unlike forward contracts, options themselves allow the producer to postpone its selling decisions. The second reason is that the procedure to generate scenarios that characterize the stochastic process involved (the pool price in this example) can use the information revealed during the first hour to generate more accurate price scenarios for the second hour, i.e., high/low prices during the first hour lead to high/low prices during the second hour. If this condition is not satisfied, postponed decisions would be made without new information and therefore, the acquisition of the put option to sell electricity would be pointless.

In short, this example illustrates that the acquisition of a call option can reduce the availability risk of generating units by allowing a power producer to sell contracting obligations to buy electricity at a fixed price, when there exists a high probability of suffering from unexpected unit failures.

Power producers face uncertainties related to price variability and production availability when trading in electricity markets. Thus, power producers must make their decisions not only to maximize the expected profit but also to reduce the profit variability caused by the uncertainty involved. While hedging against price risk through forward contracts increases the availability risk due to unexpected unit failures, electricity options allow producers to delay decisions on selling or buying a given amount of electricity at a fixed price until the beginning of the delivery period of the option. This postponement gives the holder of the option additional information to make better decisions.

Equation (A1b) expresses the total profit achieved by the producer in each scenario \( \omega \)\( \left( \Uppi_\omega \right) \) as the sum of the revenue obtained in the pool \( \left( \Uppi_\omega ^\textP \right) \), the revenue from forward contracts \( \left( \Uppi^\textF \right) \) and the option revenue \( \left( \Uppi_\omega ^\textO \right) \) minus the production cost (\( C_\omega ^\textG \)). Equation (A1c) expresses the profit in the pool as the summation over all time periods of the pool price times the power sold times the period duration. The revenue corresponding to forward contracts is calculated in (A1d) as the summation over all contracts of the contract price times the power sold times the contract duration. The option revenue of (A1e) has two terms. The second term corresponds to the cost of the option, which has to be paid regardless of whether or not the option is exercised, and that is computed as the product of the option price times, the option power times and the contract duration. The first term corresponds to the option revenue that is computed as the strike price times, the option power times and the contract duration times, a binary variable (\( y_\omega o \)) that is equal to 1 if the option is exercised, and to 0 otherwise. As stated by (A1f), the production cost is equal to the summation over time and over production units of the no-load cost plus the variable cost, being this variable cost approximated through a piecewise linear function.

Constraint (A1g) defines the generated power as the minimum power of each unit plus the summation over the production blocks b of the generated power in each block. The power generated by each unit is bounded below and above by its minimum power output and its capacity, respectively, through constraint (A1h). Note that if a unit suffers an unexpected failure (\( k_i\omega t = 0 \)), its power output is equal to 0 MW. Additionally, (A1i) and (A1j) bound each block b. Constraint (A1k) enforces that the generated power is equal to the power sold in the pool, through forward contracts, and through option contracts. The arbitrage between the pool and the futures market (forward contracts and options) is avoided by using constraints (A1l) and (A1m). Constraint (A1l) enforces that the producer can only buy electricity in the pool during those time periods in which one of its production unit is forced out. Likewise, (A1m) enforces that the generated power plus the power bought through call options cannot be higher than the total capacity of the generating units. To maximize the CVaR of the profit distribution, (A1n) is needed. Constraint (A1p) is non-anticipativity conditions which impose that decisions regarding the exercise of options depends on scenario realizations during Period 1, but they are unique regarding decisions throughout Period 2. Constraints (A1q) and (A1r) are positive and binary variable declarations, respectively. 2ff7e9595c