Risk management of power portfolios and valuation of flexibility

Abstract

Risk management by applying operational flexibility is becoming a key issue for production companies. This paper discusses how a power portfolio can be hedged through its own production assets. In particular we model operational flexibility of a hydro pump storage plant and show how to dispatch it to hedge against adverse movements in the portfolio. Moreover, we present how volume risk, which is not hedgeable with standard contracts from power exchanges, can be managed by an intelligent dispatch policy. Despite the incompleteness of the market we quantify the value of this operational flexibility in the framework of coherent risk measures.