How to get maximum value from power plant hedging

It is common practice to delta hedge, ie re-hedge over time, a fuel-fired power plant’s production. Operators switch hedges from yearly to quarterly and monthly forwards as they become more liquid. Marco Miarelli and Margherita Grasso extend the existing literature on clean spark spread hedging and quantify the value added by the hedges’ refining technique

The primary source of financial uncertainty over the revenues of fuel-fired power plants is the volatility of prices in power, fuel and emissions allowances. Traditionally, power plant operators have reduced the uncertainty of their revenues by entering into long-term agreements on power, fuel and, more recently, emissions allowances. This static strategy is not the only possibility operators face; since liquidity in wholesale markets has increased, dynamic hedging is becoming common practice.

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