Abstract
Deregulation in the electric utility industry has led to the need of financial risk management. With the advent of financial tools, participants in the power market could hedge their exposures to the price risk. This paper describes financial derivative instruments and several power contracts performed in the power exchanges and over-the-counter (OTC) markets. In addition, the modern portfolio theory to determine the optimal power contract strategy has been studied in this paper. The portfolio theory could help market participants calculate the proportions of the optimal contract portfolio among spot, futures, and any other power contract. The strategy analysis under NETA, the UK power market, has been implemented as our example of power contract portfolio. The results indicate the traditional financial theory could apply to the risk management of power contract.
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