A Multi-Stage Stochastic Electricity Portfolio Model with Forwards Contracts

A stochastic multi-stage portfolio model for a hydropower producer operating in a competitive electricity market is proposed. The portfolio includes its own production and a set of forward contracts for future delivery or purchase of electricity to hedge against risks. The goal of using such a model is to maximise the profit of the producer and reduce the economic risks connected to the fact that energy spot and forward prices are highly volatile. Our findings show that the use of forward contracts for hedging purposes results in a risk reduction and in a more efficient use of the hydroplant, taking advantage of the possibility of pumping water and ending up with a higher final value of the reservoi.