Trading wind power with barrier option

• Published in: Applied energy Vol. 182; pp. 232 - 242
• Main Authors: Xiao, Yunpeng, Wang, Xifan, Wang, Xiuli, Wu, Zechen
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 15-11-2016
• Subjects: Barrier option; Bilateral contract; Pool market; Risk management; Wind power trading; Wind power trading; Bilateral contract; Barrier option; Risk management; Pool market
• ISSN: 0306-2619; 1872-9118
• DOI: 10.1016/j.apenergy.2016.08.123

•Devised a barrier option for wind power to hedge against risks from both market price and power generation.•Devised a bilateral contract with floating power exchanges for wind power and proposed the negotiation process.•Put forward purchasing strategies of the barrier option both in pool market and with bilateral contract.
The emerging renewable power system entails competition-driven instead of non-competitive regulations for wind power. An increasing amount of wind power is therefore traded in pool market. Due to wind power’s fluctuation and randomness, wind power producers (WPPs) suffer from risks of both power generation and market price. Based on the proposed WP-traded (wind power-traded) price and equivalent WPP-traded quantity, this work devises a barrier option for wind power, with which WPPs can trade their hedged proportion of power at prices no less than a predetermined strike price during the option life. The optimal purchasing framework and negotiation process are provided both in pool market and with bilateral contract. Case studies based on the Iberian market are conducted to verify the applicability of the proposed barrier option. The results show notable benefits of the barrier option in improving WPP’s utility. The bilateral contract takes advantage of customer’s elastic demand to countervail WPP’s power deviations and charges customer a lower price. Furthermore, Efficiencies of barrier option and bilateral contract are mutually promoted as barrier option results in lower price and larger boundary range of bilateral contract, while bilateral contract leads to less possibility on over-hedging and better utilization of barrier option.