Hedging through Multi-resolution Analysis Methods in the Wholesale Electricity Market

A. Gandelli, S. Marchi, and R.E. Zich (Italy)


Electricity Market, Bilateral Contracts, Derivatives,Wavelet, Multi-resolution Analysis, Market Constraints,Demand Responsiveness.


In a workably competitive electricity market consumers can either participate in the power exchange or enter into bilateral contracts directly with brokers or specific generators. Since electricity is not storable and spare generation and transmission capacity are typically low, local peak demand can lead to extreme price spikes or transmission congestion, undermining the market stability and the system reliability. Long-term contracting reduces the exposure of market participants to price volatility. On the other hand, bilateral contracts do not tackle the risk of power reliability. This paper provides a new contracting scheme, based on the wavelet transform, for hedging the financial risk associated with spot prices and ensuring power reliability, through suitable constraints that encourage demand responsiveness.

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