Energy uncertainty risk management of hydropower generators

The output of a hydropower generator without a regulatable reservoir is determined by the streamflow, thus the output is stochastic. Hydropower generators are confronted with the energy-uncertainty risk. A risk-management framework combined with one forward contract and two electricity real options is proposed to manage the energy-uncertainty risk. Suppose a hydropower generator signs a forward contract with an electric utility. The hydropower generator can manage the energy uncertainty risk by one electricity call option and one electricity put option, this strategy is called straddle. With this risk-management framework, the hydropower generator can avoid the energy-surplus risk and energy-shortage risk. By modeling the price process and streamflow process with stochastic model, the option price is calculated based on Monte Carlo simulation. An actual hydropower generator is selected in case study to testify the effectiveness of this framework, and the influences of the hydrological variation, contract price and contract volume on the real option price and social benefit are analyzed.