Optimal Static Hedging of Price and Volumetric Risks : The Case of Renewable Energy Sources

This paper provides a risk hedging strategy for energy markets using renewable energy sources. In a climate emergency context, an understanding of optimal risk hedging strategies is not only important for energy companies, but also for regulators and policy makers. From the perspective of energy retailers, we present a solution to the problem of hedging price and quantity risks using financial instruments based on price and weather indexes. Our model considers a retailer who procures power from different sources of renewable energy generation and resells it to consumers, who exhibit a variable demand and fixed price. We propose an optimal hedging strategy that consists of a hedging portfolio of price and weather derivatives, allowing to transfer risk exposures to financial markets. We also find a vector of optimal quantities of each energy source according to expected demand. To illustrate the applicability of the proposed methodology, a case study is presented using data from renewable energy sources in Germany. Results indicate that the proposed methodology reduces the risk (variance) of the retailer's payoff distribution without compromising profitability