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
'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
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