Hedging Price Risk Using Contracts for Difference with Volume Uncertainty

Abstract

Energy market instability due to global geopolitical tensions has led to increased volatility in the electricity spot market, increasing financial risk for market participants. As a result, it is now more crucial than ever to investigate into strategies to protect against price volatility in the market. This study aims to provide a comprehensive analysis of how Contract for Difference (CfD) impacts risk mitigation for both power generators and retailers participating in the spot market. In particular, two types of CfD are considered, each dependent on the hours they are applied. The simulation results prove the presence of multiple sets of contract prices and volumes advantageous to both parties involved in the contract, allowing them to hedge against market risks without decreasing their expected profits.