Portfolio selection problem of a big consumer in the Italian electricity market

In a competitive electricity market, a consumer can manage its trading risk through trading electricity among multiple markets, such as contract markets and spot markets. The question is how to decide the trading proportion within each market in order to minimize the procurements costs and minimize the associated risk. Based on the portfolio theory, this paper proposes an approach to optimise the electric energy allocation between spot and contract markets, taking into consideration the risk due to electricity price volatility. The Italian case has been considered and, in particular, two kinds of bilateral contracts have been managed. The first characterized by fixed price and the latter indexed to fuel costs. Simulation results confirm that the proposed analytic approach is consistent with intuition and therefore useful for a consumer to make a trading plan involving risks in the electricity market.