Production planning and risk management in electricity markets

The development of well-functioning electricity markets have implications for the coordination of operations of power plants and of risk management. I will outline financial instruments used in this market, and tie these to risk management and operations. Prices of futures and options written on electricity should play a role in dynamic planning models that seemingly have little to do with financial derivatives. For example, any "option" in a hydro-thermal scheduling problem must have the same value as a financial option provided they have the same payoff. Derivative prices determine the market price of electricity risk, and the current market value of future delivery of electricity. This information should be incorporated in production planning models. Regarding risk management, I will discuss integrated vs decentralized schemes, how risk management is done in practice, and the connection to production plans.