Abstract
Motivated by a practical problem faced by an energy trading company in Poland, we investigate the profitability of balancing intermittent generation from renewable energy sources (RES). We consider a company that buys electricity generated by a pool of wind farms and pays their owners the day-ahead system price minus a commission, then sells the actually generated volume in the day-ahead and balancing markets. We evaluate the profitability (measured by the Sharpe ratio) and market risk faced by the energy trader as a function of the commission charged and the adopted trading strategy. We show that publicly available, country-wide RES generation forecasts can be significantly improved using a relatively simple regression model and that trading on this information yields significantly higher profits for the company. Moreover, we address the issue of contract design as a key performance driver. We argue that by offering tolerance range contracts, which transfer some of the risk to wind farm owners, both parties can bilaterally agree on a suitable framework that meets individual risk appetite and profitability expectations.
Highlights
Energy markets have gone through a tremendous transition during the last two decades
The pertinent question is—what is the minimum level of commission charged by the energy trader for the business to be still profitable? And three follow-up questions—what is the risk of running such a business model? Can the trader increase profits by improving the quality of renewable energy sources (RES) generation forecasts? Can the trader maintain the same level of profitability by transferring some of the risk to the wind farm owner, at the cost of charging a lower commission for its services? In this article, we address these issues
Given that the balancing prices in Poland are generally higher than in the day-ahead market, a company trading on WPKD predictions would achieve higher profits than when using more accurate, but on average higher improved forecasts, because it would sell more in the balancing market
Summary
Energy markets have gone through a tremendous transition during the last two decades. This is where energy traders see their chance to make a profit If they collect a pool of spatially diversified small RES producers and offer them better financial conditions than a utility company normally would, both sides can benefit from this situation. In Poland the intraday power market is illiquid and cannot be used to hedge deviations in RES generated volume [13] This may soon change, as in November 2019 Poland started using the XBID model, which allows for cross-border continuous trading of electricity [14]. Since companies active in the power sector compete in terms of operational excellence and portfolio management capabilities— via contract design—the presented topic is very current and features high relevance for academics and practitioners alike To our knowledge, this is the first paper that addresses this important aspect of electricity trading
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
