Risk coverage in the face of hydrological variability in a run-off hydraulic power plant using weather derivatives

José Miguel Hernández Arango, Luis Fernando Carvajal-Serna

Abstract


Colombia’s power plant system has a 68 % share of hydraulic component and a 32 % share of thermic component. Such a composition makes the system vulnerable to hydrological variability. With the aim to develop a strategy to cover against hydrological risk in a run-off hydraulic power plant, this paper shows a methodology to build an index based on the theory of weather derivatives. The index, named charge for generation, is built using stream flows and precipitation as underlying variables. The results show that the index is an alternative to reduce the volatility of revenues from energy sales in 92 % in the case of stream flows, and in 38 % for precipitation. Thus, the proposed index is effective as coverage against hydrological risk.


Keywords


Colombian power system; climate derivatives; run-off hydraulic power plant; risk coverage; hydrological risk

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DOI: http://dx.doi.org/10.17533/udea.le.n87a07

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