Electric energy uncertainty risk management of hydropower generators

Because of the hydrological uncertainty, it is difficult to estimate the energy generated by a hydropower plant in time period. A risk-management mechanism combined with one forward contract and two electricity options is proposed to manage the energy uncertainty. The hydropower plant allies with one electric power company to share in the hydro risk with this mechanism. It is proved that the cooperation of a hydropower plant and an electric power company can better manage the risk of the energy uncertainty. Furthermore this mechanism has favorable social benefit by utilizing the water resource fully. The Monte Carlo method is applied to simulate the market clearing price and the stream flow, and the option price is determined by no arbitrage pricing principle. A practical hydropower plant is selected in case study, and the influences of the hydrological variation, contract price and contract volume on the option price and social benefit are analyzed.