Cutting Edge: Co-simulation of risk factors in power markets

In this article, Jialin Zhao and Sang Baum Kang propose a simple but realistic model to co-simulate the time series of three risk factors: temperature, electricity load and prices. In addition, the authors provide load-serving entities with a quantitative analysis of an electricity price-volume joint risk, illustrate a hedging strategy using weather and electricity price derivatives, and price a tailor-made temperature-contingent contract

Co-simulation of risk factors in power markets
By offering full requirements load-serving contracts, LSEs complicate their risk exposure

'Full requirements' load-serving contracts are widely used in power markets. With such deals, a load-serving entity (LSE) agrees to provide all the electricity needs of its counterparty at a fixed retail price. End-users favour these contracts because of their price certainty. LSEs, on the other hand, find these deals bring out wider profit margins than the alternatives (Klingler 2006). By offering full requirements load-serving contracts, however, LSEs complicate their risk exposure. When

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