Minimizing market risk by trading hydro-wind portfolio: A complementarity approach

In many regions around the world (e.g. Norway, Canada and Brazil) it has been observed that exist a natural synergism in the seasonal generation profile of hydro and wind power plants, which permits the implementation of trading strategies to take advantage of this peculiarity. This paper proposes a model to analyze hydro-wind complementarity and the portfolio effect on financial profits and risk exposures. The model, which aims at to find the optimal portfolio and the amount of energy volume allocation in contracts, is optimized through Genetic Algorithm technique and uses the CVaR risk measure. It is applied to check the complementarity effect among one hydro and ten wind power plants spread over the Brazilian territory. Results obtained show strong benefit for some wind power producers when associate with hydro producers, since their risk profiles are minimized, constraint by their firm energy certificate level.