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OIES Podcast – Hedging and Tail Risk in Electricity Markets
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In this latest OIES podcast from the Electricity Programme, Dimitra Apostolopoulou talks to OIES Visiting Research Fellow Farhad Billimoria about his latest paper co-authored with Rahmat Poudineh and Jacob Mays titled “Hedging and Tail Risk in Electricity Markets”. A concern persistent in current electricity market designs has been the sufficiency of hedge markets and the capability to secure long-term contracts to underpin investment in capital-intensive generation plants. In this podcast we discuss the factors leading to these missing markets; such as retailer creditworthiness, market structure and the lack of demand side interest from consumers. We stress the key insight of the paper that contractability will be improved in future low carbon systems compared to today’s thermal dominated power systems. This is due to the fact that thermal portfolios are dominated by volatile fat-tailed commodities with significant tail dependence compared to higher tail-diversity of a renewable portfolio. Last, we discuss the some policy implication of this conclusion.
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