Insurance Contracts for Hedging Wind Power Uncertainty

Guglielmo D’Amico,Fulvio Gismondi,Filippo Petroni

doi:10.3390/math8081376

Guglielmo D’Amico, Fulvio Gismondi + Show 1 more

Open Access

https://doi.org/10.3390/math8081376

Copy DOI

Abstract

This paper presents an insurance contract that the supplier of wind power may subscribe to with an insurance company in order to immunize his/her revenue against the volatility of wind power and prices. Based on empirical evidence, we found that wind power and electricity prices are correlated. Then, we adopted a joint stochastic process to model both time series, which is based on indexed semi-Markov chains for the wind power generation process and on a general Markovian process for the electricity price process. Using a joint stochastic model allows the insurance company to compute the fair premium that the wind power producer has to pay in order to hedge the risk against inadequate revenues. Recursive type equations are obtained for the prospective mathematical reserves of the insurance contract. The model and the validity of the results are illustrated through a real data application.

Highlights

IntroductionWind energy covers a large part of renewable energy production even if this industry suffers the high variability of the wind speed process, which in turn impacts the electricity generation
The use of renewable energies is continuously expanding year-by-year, and this trend is expected to persist in the future, a decline of capacity has been observed related to lockdown measures due to the COVID-19 outbreak during 2020; see [1].Wind energy covers a large part of renewable energy production even if this industry suffers the high variability of the wind speed process, which in turn impacts the electricity generation.To remedy this problem, several solutions have been considered
We showed how to model jointly wind power and electricity prices that, according to real data, have a small negative correlation, which, cannot be ignored

Summary

Introduction

Wind energy covers a large part of renewable energy production even if this industry suffers the high variability of the wind speed process, which in turn impacts the electricity generation To remedy this problem, several solutions have been considered. We remember the recourse to energy storage systems based on batteries that can contribute to absorbing the excess of production during high wind speed periods and to yield required power during low wind speed moments. The literature on this aspect is very large, and we may refer to [2,3,4,5,6] and to the respective bibliographies. Another technical possibility is associated with hybrid power plants that help wind power production with any dispatchable energy source such as gas turbines, air compressed systems, hydroelectric plants, or different; see, e.g., [7]

Objectives

Methods

Results

Conclusion