Option-based portfolio risk hedging strategy for gas generator based on mean-variance utility model

Abstract

Natural gas generators are promising devices for reducing greenhouse gas emissions. However, gas generators encounter difficulties in the bid-to-sell process based on a relatively high levelised cost of energy for power generation. Therefore, a novel risk hedging strategy is developed based on the mean-variance portfolio theory to reduce the operational risks of gas generators and enhance their profits. Three types of options are utilised and combined to form a portfolio of financial hedges: the short put option, long put option, and short call option. Two types of energy storage devices are used to facilitate the risk hedging process, namely power-to-gas and battery devices. Simulation results demonstrate that the proposed risk hedging model can ensure higher profits for gas generators with reduced risk compared to the traditional risk hedging model and a model using only one type of option. Additionally, the varied risk preferences of gas generators lead to varied portfolio combinations. The more risk averse a gas generator, the more likely the long-put option will be utilised. In contrast, the less risk averse a gas generator, the more likely that short calls will be utilised.