Decision problems including limited liquidity in electricity markets

In most electricity markets, a key restriction for portfolio optimization is the limited liquidity. Hence, standard models for decision problems have to be adapted to cope with this situation. This paper shows an approach dealing with this situation by including a liquidity function into the standard mean- variance model going back to Markowitz. This leads to a quadratic optimization problem which is solved by using the Lagrange method. The main purpose of this paper is to analyse the optimal hedging strategies for power generators. For this, three different case studies are regarded to recognize several effects like dependency on the planning horizon or the interdependencies of electricity markets and the markets for fossil-fuels or CO₂ certificates. Therefore, the case of base electricity on the German power exchange EEX, the case of coal at the API and the CO₂ certificates are considered.