Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2006/21: Managing Flexible Load Contracts: Two simple strategies

Petter Bjerksund (), Bjarte Myksvoll () and Gunnar Stensland ()
Additional contact information
Petter Bjerksund: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Bjarte Myksvoll: Viz Risk Management
Gunnar Stensland: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway

Abstract: A flexible load contract is a type of swing option where the holder has the right to receive a given quantity of electricity within a specified period, at a fixed maximum effect (delivery rate). The contract is flexible, in the sense that delivery (the take hours) is called one day in advance. We investigate two simple strategies for managing flexible load contracts, where both use price information from the forward market. For 10 contracts traded in the period 1997-2001, we calculate the performance of the two strategies and compare with the reported performance of one complex dynamic programming approach as well as the actual results obtained by three anonymous market participants. The comparison indicates that our simple computer-efficient strategies perform better on average and produces more stable results.

Keywords: Flexible Load Contracts; computer-efficient strategies; dynamic programming

JEL-codes: C61

17 pages, December 1, 2006

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