Authors: Felipe Van de Sande Araujo, Cristina Spineti Luz, Leonardo Lima Gomes, Luís Eduardo Teixeira Brandão
Abstract: The development of simple and effective mechanisms to estimate the value of the forward curve of power could enable market participants to better price hedging or speculative positions. This could in turn provide transparency in future price definition to all market participants and lead to more safety and liquidity in the market for electricity futures and power derivatives. This work presents a model for two market participants, a buyer and a seller of a contract for difference on the future spot price of electricity in southwest Brazil. It is shown that this model is representative of all market participants that have exposure to the future price of power. Each participant’s utility function is modelled using a Generalized Extended CVaR Preference (ECP_G) and the market equilibrium is obtained through the minimization of the quadratic difference between the certainty equivalent of both agents. The results are compared with prediction of the future spot price of power made by market specialists and found to yield reasonable results when using out of sample data.
This work presents the calculations done for the article referenced above. It concerns an optimization of the parameters of an ECP_G risk measure for two agents transacting contracts for differences in the power market.