Risk Management in Congested Electricity Networks
In this paper we describe available instruments for hedging against transmission congestion risks. These include forward contracts and options. We illustrate risk management strategies for trades between two locations when transmission congestion is present. Risk management in three different markets is exemplified by the general forward market, the bilateral market, and the Nordic market. Cash flow analysis describes the conditions under which hedging is profitable and demonstrates that players can protect themselves against future price differences. Taking into account that a riskless hedge may be non-optimal if the objective is to minimize variance, the optimal hedge ratio for forward contracts is calculated.
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