Improving Financial Performance with Hedging Via Forwards for Electric Power Generation Companies

In order to improve the financial performance of electric power generation companies, we show how additional on-peak forwards can be exploited to hedge against the risk exposure of nonpeak physical power, taking advantage of the competitive market outside the regulated service territory. Specifically, we model the evolution of the forward price as a geometric Brownian motion (GBM) process without drift and show how the optimal amount of additional on-peak forwards can be determined under the mean minus variance criterion via simulation. Furthermore, we show how the simulation approach and the analytical results may lead to a robust decision-making process.