Citation:

Ritesh Kumar. "Hedging Hourly Shaping Risks in Power Portfolio" International Research Journal of Economics and Management Studies, Vol. 1, No. 1, 2022, pp. 25-29.

Abstract:

Although electricity price forecasting has been modeled in many studies, most works have focused on monthly or block-level forecasts, hence leaving the price dynamics and associated risks at the hourly level largely unexplored. This paper discusses the Hourly Shaping Risks within power portfolios arising because of the mismatch between the block-traded instruments and the hourly settlement of power markets. The key drivers of hourly price shapes include load fluctuations, generation mix variability, renewable intermittency, and transmission constraints. In developing a hedging framework for addressing such challenges, a Principal Component Analysis-based approach is proposed to quantify and mitigate shaping risks by capturing the dominant variation in hourly price structure. The methodology incorporates simulation of hourly shapes from market-observed block prices, construction of shape libraries from historical data, and determination of optimal hedge instruments associated with the principal components of portfolio risk. Empirical results using the ERCOT market data for July and August 2017 demonstrate that the proposed model effectively captures the shape-driven variations and offsets about 67% of the shaping losses through strategic hedging. These results show the value of incorporating hourly granularity and statistical dimension reduction in the management of power portfolio risk.

References:

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Keywords:

Shaping Risks, Power Hourly Price, Hedge, Simulation, Power Portfolio, Principal Component Analysis