Retail consumers and risk in centralized energy auctions for indexed long-term contracts in Chile

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Title: Retail consumers and risk in centralized energy auctions for indexed long-term contracts in Chile
Author(s): Reus, L
Munoz, F
Moreno Vieyra, R
Item Type: Journal Article
Abstract: Centralized energy auctions for long-term contracts are commonly-used mechanisms to ensure supply adequacy, to promote competition, and to protect retail customers from price spikes in Latin America. In Chile, the law mandates that all distribution companies must hold long-term contracts—which are awarded on a competitive centralized auction—to cover 100% of the projected demand from three to fifteen years into the future. These contracts can be indexed to a series of financial parameters, including fossil fuel prices at reference locations. Drawing from portfolio theory, we use a simple example to illustrate the difficulties of selecting, through the current clearing mechanism that focuses on average costs and individual characteristics of the offers, a portfolio of long-term energy contracts that could simultaneously minimize the expected future cost of energy and limit the risk exposure of retail customers. In particular, we show that if the objective of the regulator is to limit the risk to regulated consumers, it could be optimal to include contracts that would not be selected based on individual characteristics of the offers and a least-cost auction objective, but that could significantly reduce the price variance of the overall portfolio due to diversification effects between indexing parameters.
Publication Date: 1-Mar-2018
Date of Acceptance: 18-Dec-2017
ISSN: 0301-4215
Publisher: Elsevier
Start Page: 566
End Page: 577
Journal / Book Title: Energy Policy
Volume: 114
Copyright Statement: © 2017 Elsevier Ltd. All rights reserved. This manuscript is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International
Keywords: MD Multidisciplinary
Publication Status: Published
Online Publication Date: 2018-01-04
Appears in Collections:Faculty of Engineering
Electrical and Electronic Engineering

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