Risk management in the retail electricity market: the retailer's perspective

The retail company on the liberalized electricity market faces an increasing price risk exposure, stemming from the uncertain demand and the wholesale market price volatility. In the paper the influence of the stochastic parameters on the retailer's overall risk exposure is analyzed. After constructing the appropriate models for consumer demand, electricity spot price and forward price curve, the influence of the wholesale forward-price volatility in combination with the maturity of the sales-contract offer on the retailer's risk exposure is investigated. The proposed model was used for risk-premium determination, and the results were compared with those of a traditional technique from option-pricing theory. The results of a Monte Carlo simulation illustrate how forward-price volatility influences the retailer's total risk. The model is of immediate practical value to the electricity retailer since it enables the evaluation of risk arising from the different stochastic drivers.