Comparing hedging methods for wind power: Using pumped storage hydro units vs. options purchasing

Kory Hedman, Gerald B. Sheblé

Research output: Chapter in Book/Report/Conference proceedingConference contribution

51 Citations (Scopus)

Abstract

The main setback for wind energy is the uncertainty and uncontrollability of the energy source. Researchers are trying to create ways to handle this uncertainty by means of energy storage through pumped storage hydro facilities, compressed air facilities, etc. This paper will analyze the option of using a pumped storage hydro plant to negate this uncertainty from a financial viewpoint. In addition, this paper analyzes whether or not such an option is truly best by comparing it to the case where the wind farm can purchase call/put options to protect against the uncertainty of the wind. To determine the proper price of these options, the Black-Scholes options pricing model is used to ensure there is no ability to arbitrage, i.e. there is no free lunch. This second option will also consider the pumped storage plant's financial gain when working independent as well in order to make a fair comparison. The objective of this paper is to analyze the effectiveness of these hedging methods and the financial implications.

Original languageEnglish (US)
Title of host publication2006 9th International Conference on Probabilistic Methods Applied to Power Systems, PMAPS
DOIs
StatePublished - 2006
Externally publishedYes
Event2006 9th International Conference on Probabilistic Methods Applied to Power Systems, PMAPS - Stockholm, Sweden
Duration: Jun 11 2006Jun 15 2006

Other

Other2006 9th International Conference on Probabilistic Methods Applied to Power Systems, PMAPS
CountrySweden
CityStockholm
Period6/11/066/15/06

Fingerprint

Wind Power
Purchasing
Hedging
Wind power
Unit
Uncertainty
Compressed air
Black-Scholes
Wind Energy
Energy storage
Farms
Energy Storage
Arbitrage
Option Pricing
Costs
Energy

Keywords

  • Black-scholes options pricing model
  • Call & put options
  • Energy storage
  • Hedging
  • Monte-Carlo simulations
  • Power systems economics
  • Pumped-storage hydro
  • Real options analysis
  • Renewable energy sources
  • Risk analysis
  • Stochastic processes
  • Wind energy

ASJC Scopus subject areas

  • Statistics, Probability and Uncertainty
  • Control and Systems Engineering
  • Statistics and Probability

Cite this

Hedman, K., & Sheblé, G. B. (2006). Comparing hedging methods for wind power: Using pumped storage hydro units vs. options purchasing. In 2006 9th International Conference on Probabilistic Methods Applied to Power Systems, PMAPS [4202214] https://doi.org/10.1109/PMAPS.2006.360202

Comparing hedging methods for wind power : Using pumped storage hydro units vs. options purchasing. / Hedman, Kory; Sheblé, Gerald B.

2006 9th International Conference on Probabilistic Methods Applied to Power Systems, PMAPS. 2006. 4202214.

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Hedman, K & Sheblé, GB 2006, Comparing hedging methods for wind power: Using pumped storage hydro units vs. options purchasing. in 2006 9th International Conference on Probabilistic Methods Applied to Power Systems, PMAPS., 4202214, 2006 9th International Conference on Probabilistic Methods Applied to Power Systems, PMAPS, Stockholm, Sweden, 6/11/06. https://doi.org/10.1109/PMAPS.2006.360202
Hedman K, Sheblé GB. Comparing hedging methods for wind power: Using pumped storage hydro units vs. options purchasing. In 2006 9th International Conference on Probabilistic Methods Applied to Power Systems, PMAPS. 2006. 4202214 https://doi.org/10.1109/PMAPS.2006.360202
Hedman, Kory ; Sheblé, Gerald B. / Comparing hedging methods for wind power : Using pumped storage hydro units vs. options purchasing. 2006 9th International Conference on Probabilistic Methods Applied to Power Systems, PMAPS. 2006.
@inproceedings{a4e06814968946f8b2ec292f3f410ed6,
title = "Comparing hedging methods for wind power: Using pumped storage hydro units vs. options purchasing",
abstract = "The main setback for wind energy is the uncertainty and uncontrollability of the energy source. Researchers are trying to create ways to handle this uncertainty by means of energy storage through pumped storage hydro facilities, compressed air facilities, etc. This paper will analyze the option of using a pumped storage hydro plant to negate this uncertainty from a financial viewpoint. In addition, this paper analyzes whether or not such an option is truly best by comparing it to the case where the wind farm can purchase call/put options to protect against the uncertainty of the wind. To determine the proper price of these options, the Black-Scholes options pricing model is used to ensure there is no ability to arbitrage, i.e. there is no free lunch. This second option will also consider the pumped storage plant's financial gain when working independent as well in order to make a fair comparison. The objective of this paper is to analyze the effectiveness of these hedging methods and the financial implications.",
keywords = "Black-scholes options pricing model, Call & put options, Energy storage, Hedging, Monte-Carlo simulations, Power systems economics, Pumped-storage hydro, Real options analysis, Renewable energy sources, Risk analysis, Stochastic processes, Wind energy",
author = "Kory Hedman and Shebl{\'e}, {Gerald B.}",
year = "2006",
doi = "10.1109/PMAPS.2006.360202",
language = "English (US)",
isbn = "9171783520",
booktitle = "2006 9th International Conference on Probabilistic Methods Applied to Power Systems, PMAPS",

}

TY - GEN

T1 - Comparing hedging methods for wind power

T2 - Using pumped storage hydro units vs. options purchasing

AU - Hedman, Kory

AU - Sheblé, Gerald B.

PY - 2006

Y1 - 2006

N2 - The main setback for wind energy is the uncertainty and uncontrollability of the energy source. Researchers are trying to create ways to handle this uncertainty by means of energy storage through pumped storage hydro facilities, compressed air facilities, etc. This paper will analyze the option of using a pumped storage hydro plant to negate this uncertainty from a financial viewpoint. In addition, this paper analyzes whether or not such an option is truly best by comparing it to the case where the wind farm can purchase call/put options to protect against the uncertainty of the wind. To determine the proper price of these options, the Black-Scholes options pricing model is used to ensure there is no ability to arbitrage, i.e. there is no free lunch. This second option will also consider the pumped storage plant's financial gain when working independent as well in order to make a fair comparison. The objective of this paper is to analyze the effectiveness of these hedging methods and the financial implications.

AB - The main setback for wind energy is the uncertainty and uncontrollability of the energy source. Researchers are trying to create ways to handle this uncertainty by means of energy storage through pumped storage hydro facilities, compressed air facilities, etc. This paper will analyze the option of using a pumped storage hydro plant to negate this uncertainty from a financial viewpoint. In addition, this paper analyzes whether or not such an option is truly best by comparing it to the case where the wind farm can purchase call/put options to protect against the uncertainty of the wind. To determine the proper price of these options, the Black-Scholes options pricing model is used to ensure there is no ability to arbitrage, i.e. there is no free lunch. This second option will also consider the pumped storage plant's financial gain when working independent as well in order to make a fair comparison. The objective of this paper is to analyze the effectiveness of these hedging methods and the financial implications.

KW - Black-scholes options pricing model

KW - Call & put options

KW - Energy storage

KW - Hedging

KW - Monte-Carlo simulations

KW - Power systems economics

KW - Pumped-storage hydro

KW - Real options analysis

KW - Renewable energy sources

KW - Risk analysis

KW - Stochastic processes

KW - Wind energy

UR - http://www.scopus.com/inward/record.url?scp=46149115410&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=46149115410&partnerID=8YFLogxK

U2 - 10.1109/PMAPS.2006.360202

DO - 10.1109/PMAPS.2006.360202

M3 - Conference contribution

AN - SCOPUS:46149115410

SN - 9171783520

SN - 9789171783523

BT - 2006 9th International Conference on Probabilistic Methods Applied to Power Systems, PMAPS

ER -