The Economics of Electricity Hedging and a Proposed Modification for the Futures Contract for Electricity

First, this paper provides a simple explanation of the economics of electricity hedging and shows why the unique characteristics of electric power make risk management more complex than for other commodities. Second, a change in the futures contract for electric power is proposed that reflects these unique characteristics. These changes would create a unique resettlement mechanism that would make the futures contract more useful for hedgers on both sides of the market. Finally, a sample of data are analyzed to evaluate the effectiveness of this proposal.