Simultaneous optimization for wind derivatives based on prediction errors

Abstract

Wind power energy has been paid much attention recently for various reasons, and the production of electricity with wind energy has been increasing rapidly for a few decades. In this work, we will propose a new type of weather derivatives based on the prediction errors for wind speeds, and estimate their hedge effect on wind power energy businesses. At first, we will investigate the correlation of prediction errors between the power output and the wind speed in a Japanese wind farm. Then we will develop a methodology that will optimally construct a wind derivative based on the prediction errors using nonparametric regressions. A simultaneous optimization technique of the loss and payoff functions for wind derivatives is demonstrated based on the empirical data.