Hedging weather exposure

Assume DisCo, a power distribution company, has full service requirement contracts with customer(s). The customer is paying fixed-price (tariff) T per MWh, and the customer's weather-sensitive power demand L is approximately linear in temperature (or rather degree days, eg, Diaz and Quayle [1980]), t:

Figures 7 and 8 show the probability density distribution for weather-contingent change in DisCo revenue under the five hedging scenarios. Figure 7 corresponds to an ideal case when hedging can be d

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