This paper analyses risk management of fixed price, unspecified consumption contracts in energy markets.
We model the joint dynamics of the spot-price and the consumption of electricity, study expected loss
minimisation for different loss measures, and derive optimal static hedge strategies based on forward contracts.
The strategies are implemented empirically and compared to a benchmark strategy widely used by
the industry. On 2012–2014 Nordic market data, the suggested hedges significantly outperform the benchmark:
The realised cumulative profit-and-losses are greater for almost every single one-month period and
the hourly realised payoffs result in an approximate 65% out-performance probability. Hedges based on
asymmetric loss measures yield markedly higher reward-to-risk ratios than the benchmark, which can be
exploited to release a premium from the contract in the financially significant order of 1.5% of the fixed price.