A looming revolution: Implications of self-generation for the risk exposure of retailers

Abstract

Abstract Managing the risk associated with uncertain load and prices has always been a challenge for retailers in electricity markets. While a number of standard derivatives contracts are available to hedge the price risk, managing the load variability used to be comparatively straightforward as this variability was largely predictable in the past, especially when aggregating a large number of consumers. In contrast, the increasing penetration of unpredictable, small-scale electricity generation by consumers, i.e. self-generation, constitutes a new volume risk that cannot be hedged through standard derivatives contracts. Using a DCC-GARCH approach and Monte Carlo simulations based on German historical loads and prices, the contribution of decentralized solar PV self-generation to the load, price and revenue risk of retailers is assessed. Our results reveal a significant revenue risk exposure of retailers arising from increasing levels of intermittent self-sufficiency, which is largely driven by the increasing load risk and to a lesser extent by the increasing price risk. Therefore, this analysis is relevant when considering distributed energy systems and peer-to-peer business models entailing a load forecasting challenge for traditional retailers, which will be crucial to address in the context of the transition towards power systems based on renewables.