1

Abstract The main objective of this work is to present a

methodology that determines the Back up contract level and
pricing criteria that takes into account the risk aversion profile of
the investors. The risks considered are those associated with
random forced outages and spot price volatility in hydro-thermal
systems.
The Back up contract level is determined based on VaR
concept according to the Back up requirement probability
distribution and the hedging level desired by the investor. Two
pricing criteria are presented and discussed: the Mean Value and
the Certainty Equivalent. The latter takes into account the
investors risk aversion by means of utility functions. The
methodology is applicable to portfolios of hydro and thermal
plants operating in different systems, i.e. with possible different
spot prices.
A case study analysing the impact of Back up strategies for a
set of hydro and thermal plants is presented and discussed by
using a configuration of the Brazilian system.
Key words: Hydro-thermal System, Forced Outages, Hydrological
Risk, Hedging Strategies, Insurance, Back Up Pricing,
Diversification, Efficient Portfolios.
I. INTRODUCTION
egardless of the power sector trading arrangements
adopted in a specific country, one of the risks faced by
the generators is associated with the availability of the
generation units due to random forced outages. These failures
impact the investors revenue leading to financial exposure in
accordance with the contract levels and the specific energy
market rules.
Forced outages impact the return of investors in two ways:
loss of revenue in periods when the plant should be dispatched
and/or the necessity of buying energy in the spot market to
honor their contracts, e.g., bilateral contracts (PPAs). In the
case of hydrothermal systems these outages may imply in very
high financial exposure, depending on the hydrological
conditions.
Also, generation companies with power plants located in
different systems and/or with contracts signed with power
utilities also located in different systems, may face additional
financial exposure when the Short Run Marginal Cost
(SRMC) of the systems are significantly different.
Hedging strategies, including appropriate levels of
contracts in different systems, are essential to mitigate these
risks. One possible hedging strategy is the use of Back up
contracts.

1 All the authors are with CEPEL, the Brazilian Electric Power Research
Center, Rio de J aneiro, Brazil (e-mail: mlisboa@cepel.br).
II. MAIN ASPECTS OF THE BRAZILIAN OPERATION SYSTEM
The Brazilian electric system is hydro-dominated (90% of
the installed capacity) and presents large reservoirs with multi-
annual regularization capacity, distributed over several
hydrographic basins. The energy dispatch of the hydro and
thermal plants is determined in a centralized way, by the
Brazilian ISO (Independent System Operator), in order to
optimize the operation of the whole Brazilian electric system.
In order to mitigate the financial exposure risk inherent in a
hydro-thermal system operating in a tight pool scheme, it has
been established in the Brazilian system the Energy
Reallocation Mechanism (ERM)[1]. Through this mechanism,
the sum of all hydro-plants monthly generation are divided
among the hydro-plants proportionally to their firm energy
2
.
In this way, those plants that generated less due to the
optimization of the system operation can honor their contracts,
except in case of rationing.
In a hydro-dominated system, due to their operational
costs, the thermal plants can not sell energy at competitive
prices, thus having difficulties to establish long term contracts.
Because thermal plants are essential to minimize the risk of
energy shortage during dry seasons, the Government
established some fuel subsidies in the past in order to make the
thermal plants viable. The subsidy called CCC (Conta de
Consumo de Combustvel) is used to cover the total fuel costs
of a thermal plant. Due to the current model adopted by the
Brazilian electric system, it has been established by the
regulatory Agency that this subsidy will decrease 25% per
year from 2003 on.
III. METHODOLOGY
The methodology presented in this work calculates the
price limit for Back up energy contracts that the generation
agents would be willing to pay considering their risk aversion
profile. These contracts cover forced outages of generating
units and hydrological risks of a portfolio of hydro and
thermal plants. The methodology is based on a probabilistic
approach similar to that presented by the authors in a recent
publication [2]. It is a more comprehensive methodology
because it includes the simulation of hydro-plants operation,
the risk aversion of the generation agents, some commercial
rules and fuel subsidies. Figure 1 illustrates the flow chart of
the main calculations. The algorithm starts with the system

2 The Brazilian Electricity Regulatory Agency (ANEEL) determines the
systemfirmenergy. The firmenergy is allocated among the hydro power
plants and constitutes the ceiling to the quantity of electricity that a generator
can sell through bilateral contracts.
Methodology for Pricing Energy Back Up
Contracts of a Portfolio of Power Plants
M. L. V. Lisboa F. R. S. Batista D. D. J . Penna R.C. Torres R.P. Caldas A.C.G. Melo
Rio de J aneiro - Brazil
R
Paper accepted for presentation at 2003 IEEE Bologna Power Tech Conference, June 23th-26th, Bologna, Italy
0-7803-7967-5/03/$17.00 2003 IEEE
operation simulation using the NEWAVE model (adopted by
the Brazilian ISO) [3]. This model aggregates the hydro-plants
in four equivalent subsystems and determines their monthly
optimal energy dispatch for the period analyzed considering
up to 2000 scenarios of water inflows. The simulation results
include series of monthly SMRC (spot price) scenarios for
each subsystem and individual thermal plants monthly
dispatches.
Another model, called SUISHI-O [3], also developed by
CEPEL, is then used to determine the individual hydro-plant
monthly energy dispatch based on NEWAVE simulation
results.
For each water inflow scenario considered, a Monte Carlo
simulation of the failure/repair process of the hydro and
thermal generating units is carried out. The times to failure
(ttf) and the times to repair (ttr) are modeled using exponential
distributions [2].
The following step is the ERM calculations: based on
algebraic rules, the total energy generated in the system is
distributed among the hydro-plants proportionally to their
corresponding firm energy. The final value of the plant
dispatch G
m
is then obtained by adding (or subtracting) the
plant ERM energy to the plant dispatch determined by
NEWAVE/SUISHI-O. The ERM includes all the hydro-plants
dispatched by the ISO and also the thermal plants which are
participants of the CCC subsidy (because their fuel costs are
covered by this subsidy).
Finally, monthly cash flows are calculated for each water
inflow scenario, using the final value of hydro and/or thermal
plant dispatches, i.e. the dispatch values considering the
failure/repair process and ERM. In order to simplify the cash
flow calculations, it has not been considered tax payments,
debts and investments, thus resulting in the following monthly
cash flow equation:
ts Fixed ts Fuel TMO ERM E
Pspot CS Pspot GS P C CF
NS
s
s s
NC
i
NS
s
s s i i
cos cos ) * _ (
) * ( ) * ( ) * (
1 1 1

+ =

= = =
NC =Number of contracts;
C =Bilateral contract level;
P =Bilateral contracts price;
NS =Number of subsystems;
GS =Total subsystem portfolio generation;
Pspot =Subsystem Spot price;
CS =Total subsystems contracts;
E_ERM =received /given ERM energy;
TMO =Optimization tariff.
A present value for each monthly cash flow serie (CFPV) is
then determined, thus allowing to define a probability
distribution for this financial index. Based on this distribution,
two criteria to calculate the maximum price for the Back up
contracts have been implemented:
Mean Value Criterion
Certainty Equivalent Criterion
While the first criterion is adequate for risk neutral
investors, the latter allows to consider the risk aversion profile
of the investors by using the utility function and certainty
equivalent concepts.
A. Mean Value Criterion
By this criterion, the maximum price that the agent would
be willing to pay for the Back up contract is determined as
follows [2]:
(i) a complete simulation is carried out considering the
failure / repair process, but without the Back up
contract covering;
(i) a probability distribution is obtained for the CFPV
series;
(ii) another simulation is then carried out considering the
Back up covering without the payment of the back up
tariff and a second CFPV probability distribution is
obtained;
(iii) by comparing both distributions, the Back up
contract benefit can be determined. In this work, the
benefit is the difference between the mean values of
the two CFPV probability distributions:
[ ] [ ]
bckp without
CFPV E
bckp with
CFPV E Benefit =
(iv) Finally, the maximum price P
m
that the agent would
be willing to pay is calculated by the following
equation:
i n
a EBK
Benefit
m
P
*
=
where:
i i
i
a
n
n
i n
* ) 1 (
1 ) 1 (
+
+
=
is the present value of periodical uniform
series;
i =monthly discount factor;
n =number of months considered;
EBK =Back up contract level [MWh/h].
P
m
is the Back up contract price: the present value of monthly
payments of P
m
over the period considered is equal to the
benefit of the Back up contract.
WITH FAILURE
NEWAVE
THERMAL DISPATCH
GENERATION
SUISHI - O
HYDRO DISPATCH
FAILURE
SIMULATION
ERM
CASH FLOW
WITH FAILURE AND
WITH BACK UP
BACK UP PRICE
Fig. 1. Flow Chart of the Methodology for Pricing Back Up Contract
B. Certainty Equivalent Criterion
It is possible that risk averse investors would be willing to
pay more for the Back up contracts than the P
m
value
determined through the Mean Value criterion. This aspect can
be considered by using utility functions, which convert
monetary values to utility units to represent the risk aversion
profile of the investor. Figure 2 shows the utility functions for
a risk lover, risk neutral and risk averse investors,
respectively.
x
U(x)
x
U(x)
x
U(x)
Risk lover Risk neutral Risk averse
Fig. 2. Utility functions
By applying an utility function appropriate to the risk
aversion profile of the investor to the CFPV probability
distributions (with and without Back up), utility probability
distributions can be obtained. By definition [4]:
U(CFPV*)=E[U(CFPV)] (7)
where:
CFPV* =Certainty Equivalent
The benefit can then be calculated by the difference
between the certainty equivalents (with and without Back up):
* *
bckp without
bckp with
CFPV CFPV Benefit =
(8)
The price that the investor would be willing to pay can then
be determined by applying the benefit value to equation (6).
In this work, it has been adopted the following utility
function [4]:
CFPV b
CFPV a
e CFPV U *
*
) ( +

= (9)
where the parameters a and b define the risk aversion degree
of the investor.
Figure 3 illustrates how a given CFPV probability
distribution is perceived by a risk averse investor when using
the utility function given by equation (9), with the coefficients
a and b equal to 0,08 and 1,00, respectively.
-200
-150
-100
-50
0
50
100
150
200
250
1 3 5 7 9
1
1
1
3
1
5
1
7
1
9
2
1
2
3
2
5
2
7
2
9
3
1
3
3
3
5
3
7
3
9
4
1
4
3
4
5
4
7
4
9
5
1
5
3
5
5
5
7
5
9
6
1
6
3
6
5
6
7
Water Inf l ow Scenari os
C
F
P
V

(
M
R
$
)
,

U
(
C
F
P
V
)
CFPV U(CFPV)
Fig. 3. Utility function for a risk averse investor
C. Back Up Contract Level
The pricing criteria described in sections III.a and III.b is
based on a pre-defined Back up contract level EBK. This value
was defined empirically in [2], however, a value appropriate to
the risk aversion profile of the investors can be determined
based on VaR concept.
The total Back up energy necessity is a function of the
failure/repair rates of the generating units, ERM
received/given energy, and the bilateral contracts. Therefore,
for a given month i, hydrological series j, the required Back up
energy is:
j i s
NU
s
NC
k
i k j i Gm C bkp , ,
1 1
, , =
= =
where NU is the number of plants in the portfolio, and
variables as defined previously. If the resulting difference is
negative, bkp
i,j
=0.
Based on the monthly bkp series calculated by equation
(10), one can build the bkp probability distribution and its
corresponding bkp cumulative probability curve can be built.
Depending on the degree of the investors risk aversion, a
hedging level is chosen. Based on this value and on the bkp
cumulative probability curve, the level of Back up energy
contract is determined.
D. Efficient Portfolios
Back up contract is an efficient way to mitigate the
financial risks associated with a portfolio of power plants.
However, the Brazilian energy market has not developed up to
this stage yet, and therefore, this is not an available
alternative.
Instead of Back up contracts, another alternative to mitigate
the portfolio financial risks is to reduce the bilateral contracts,
i.e. to establish bilateral contracts below the total energy of
the portfolio of power plants. In other words, saving part of
the available energy to be negotiated in the spot market. The
question that arises is which level of bilateral contract should
be established? This question can be answered based on the
concept of efficient portfolios [5].
Efficient portfolios of contracts can be easily obtained
through different ways. In this work, they are obtained by
performing several simulations varying bilateral contracts
from zero to 100% of the total firm energy in each subsystem.
From the results, efficient portfolios are obtained with the
E[CFPV] and a chosen percentile value of the CFPV
distribution.
If Back up contracts become an available alternative in a
near future, it is possible to include them in the portfolios
composition. To do so, for each point of the efficient
portfolios previously described and for a given Back up price,
simulations should be carried out by varying the Back up
contract level from zero to 100% of the maximum Back up
necessity of the portfolio of power plants. In these simulations,
the cash flow equation must be changed to include the Back
up payments.
(10)
IV. TEST SYSTEM
The test system consists of four hydro-plants and three
thermal plants arbitrarily chosen from the Brazilian system.
Here they have been denominated by the letters A to D and
their corresponding data is given in Tables I and II.
TABLE I
HYDRO-PLANTS DATA
Hydro Plant A B C D
Installed Capacity (MW) 424 1676 1140 500
Subsystem South-east South South South
Contracted Energy (MWh/h) 336 576 529 190
Availability (%) 91.91 87.88 87.88 91.91
Failure Probability (%) 2.53 2.92 2.92 2.53
Times to Failure (fl/year) 9 8 8 9
Times to Repair (h) 25 35 35 25
TABLE II
THERMAL PLANTS DATA
Thermal Plants A B C
Installed Capacity (MW) 126 120 150
Subsystem South South-east South
Contracted Energy (MWh/h) 96 0 135
Availability (%) 88.91 100.00 88.91
Variable Cost (R$/MWh) 30.89 114.57 35.91
Fixed Cost (MR$/year) 2.00 2.00 2.00
Failure Probability (%) 1.79 0.00 1.79
Times to Failure (fl/ano) 4 0 4
Times to Repair (h) 42 0 42
The time horizon considered for this study is 5 years
starting in 2002 until 2006. Table III describes the evolution of
the total capacity of each subsystem during this period. These
values are required for ERM calculations.
The hydro and thermal plant monthly dispatch and
subsystem spot price series were obtained by simulating the
NEWAVE and SUISHI-O models using a configuration of the
Brazilian generating system. The available Brazilian historical
inflow data (67 years) was also used.
The bilateral contracts for the period considered are
described in Table IV.
TABLE III
FIRM ENERGY OF THE BRAZILIAN SYSTEM FOR ERM CALCULATIONS
(MWH/H)
Subsystem / Year 2002 2003 2004 2005 2006
South-East 24815 24878 25117 25194 25672
South 4895 5025 5025 5232 5842
North-East 5803 6194 6194 6194 6194
North 3113 3583 4148 4164 4164
TABLE IV
PORTFOLIO CONTRACTS ( MWH/H)
2002
2003
2004
2005
2006
83
91
97
103
1749
1743
1736
1730
Year South South-East
1756 77
It is important to emphasize the algorithm assumes that the
Back up energy should cover the forced outages and
hydrological risk at any time.
V. RESULTS
A. Back Up Contract Level and Price
Based on the hydro and thermal plant dispatches and the
failure/repair process simulation results, a histogram and
cumulative distribution function of Back up necessity are
obtained (see Section III.c) and these curves are illustrated in
Figure 4.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
-
3
5
3
5
-
7
0
7
0
-
1
0
4
1
0
4
-
1
3
9
1
3
9
-
1
7
4
1
7
4
-
2
0
9
2
0
9
-
2
4
3
2
4
3
-
2
7
8
2
7
8
-
3
1
3
3
1
3
-
3
4
8
3
4
8
-
3
8
2
3
8
2
-
4
1
7
4
1
7
-
4
5
2
4
5
2
-
4
8
7
4
8
7
-
5
2
1
5
2
1
-
5
5
6
5
5
6
-
5
9
1
5
9
1
-
6
2
6
6
2
6
-
6
6
0
6
6
0
-
6
9
5
6
9
5
-
7
3
0
7
3
0
-
7
6
5
7
6
5
-
7
9
9
7
9
9
-
8
3
4
8
3
4
-
8
6
9
8
6
9
-
9
0
4
9
0
4
-
9
3
9
9
3
9
-
9
7
3
9
7
3
-
1
0
0
8
>
1
0
0
8
Back Up Necessi ty
(
%
)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
(
%
)
Probability Cumulative Probability
Fig. 4. Back up necessity histogram
Based on the cumulative distribution function of Figure 4,
the Back up contract level can be determined according to the
level of hedging desired (VaR value). Based on the chosen
level, the Back up price can then be determined through the
Mean Value or Certainty Equivalent criteria.
Table V illustrates the Back up contract levels for different
VaR levels and their corresponding Back up prices determined
through the Mean Value and Certainty Equivalent criteria. For
example, to achieve a hedge of 100% against 95% of all
possible situations of failure and unfavorable hydrological
conditions, for the portfolio considered, the investor must
contract 362.41 MW of Back up at the maximum price of 7.88
R$/MWh.
TABLE V
HEDGING LEVEL VERSUS BACK UP PRICES (I)
Mean
Certainty
Equivalent
25% 0.00 1786.76 0.00 0.00
50% 56.92 1809.87 14.90 14.92
75% 144.46 1836.06 12.53 12.53
80% 171.59 1841.85 11.78 11.78
85% 208.07 1848.34 10.86 10.86
90% 263.08 1855.98 9.66 9.66
95% 362.41 1864.54 7.88 7.88
100% 1042.81 1871.10 2.97 2.97
(*) E[CFPV] before Back up action =1786.76 MR$
Back Up Price
(R$/MWh)
VaR
Back Up
(MWh/h)
E[CFPV] After
Backup Action
(MR$)
Due to the simplifications, and particularly for being
composed of hydro and thermal plants, the portfolio
considered presents very few cases of negative CFPV.
Therefore, the CFPV distribution does not change if a utility
function is applied to it (see positive values of the distribution
curve of Figure 3). As a result, the Mean Value and the
Certainty Equivalent criteria yield the same Back up contract
prices.
In order to illustrate the effect when considering the
investor risk aversion, another portfolio has been defined by
excluding the hydro-plants from the original one and
proportionally reducing the bilateral contracts. In this case,
with only thermal plants operating in a hydro dominated
system, there are more CFPV negative values, specially
because one of the plants is a merchant type one. The results
are illustrated in Table VI.
TABLE VI
HEDGING LEVEL VERSUS BACK UP PRICES(II)
Mean
Certainty
Equivalent
25% 37.95 -3.50 7.84 10.60
50% 102.04 5.96 6.31 7.81
75% 123.27 7.92 5.89 7.07
80% 124.61 7.98 5.76 7.03
85% 126.40 8.03 5.70 6.94
90% 126.40 8.03 5.70 6.94
95% 126.40 8.03 5.70 6.94
100% 282.94 8.42 2.55 3.11
(*) E[CFPV] before Back up action =-11.60 MR$
Back Up Price
(R$/MWh)
VaR
Back Up
(MWh/h)
E[CFPV] After
Backup Action
(MR$)
B. Efficient Portfolios
Assuming that the investor is not willing to establish the
total bilateral contracts officially allowed in order to mitigate
the financial risks, part of the available energy is negotiated in
the spot market as a hedge mechanism. For the original
portfolio of hydro and thermal plants, the optimal amount of
bilateral contracts and its location can be chosen from the
efficient portfolios illustrated in Figure 5.
These efficient portfolios were obtained through several
simulations by varying the total bilateral contracts from zero
to 100%, in steps of 5%. The total bilateral contracts is the
sum of the contracts in the subsystems considered: South and
Southeast. The difference between these contracts and the
portfolio firm energy is negotiated at the spot market.
-200
0
200
400
600
800
1000
1200
1400
1600
1800
0 500 1000 1500 2000 2500
E[CFPV] (MR$)
P
e
r
c
e
n
t
i
l
e

5
%


(
M
R
$
)
100% Spot
100% Contr. inSouth-east
100% Contr. inSouth
E[CFPV] =1630.48
Fig. 5. Efficient Portfolios
The efficient portfolios are those one with E[CFPV] values
greater than MMR$1630.48, i.e. those points of the figure with
the highest E[CFPV] values associated with the lowest risk
levels. From this figure, it also can be noted that for a given
total bilateral contract, the risks increase when the proportion
of the contracts in the South, where most of the plants are
located, decreases.
From these results, the optimal portfolio of contracts is
any one with 85% to 100% of the total firm energy being
negotiated exclusively in the South subsystem through
bilateral contracts, and the remaining available energy
negotiated in the spot market. The investor should choose one
of these efficient portfolios according to the hedging level
desired. Risk averse investors probably would choose the
portfolio consisting of 85% of bilateral contracts established in
the South and 15% in the spot market (lowest risk).
Assuming now that Back up contracts are available in the
energy market, new efficient portfolios could be obtained by
including this type of contract.
In order to analyze the effect of Back up contracts in the
efficient portfolios of Figure 5, some additional simulations
were carried out by varying the Back up contract level from
zero to 100% of the portfolio maximum Back up necessity, for
a Back up contract price of 5 R$/MWh. From the results,
illustrated in Figure 6, it can be noted that the new efficient
portfolios consist now exclusively of bilateral and Back up
contracts (i.e. 0% in the spot market). The effect of Back up
contracts is to reduce the risk level and increase the E[CFPV].
-200
0
200
400
600
800
1000
1200
1400
1600
1800
2000
0 200 400 600 800 1000 1200 1400 1600 1800 2000 2200
E[CFPV] (MR$)
P
e
r
c
e
n
t
i
l
e

5
%


(
M
R
$
)
100%SPOT
100%CONTRACTED
BACK UP EFFECT
Fig. 6. Efficient portfolios including Back Up (Back up price of 5R$/MWh)
The new set of efficient portfolios is shown in Figure 7 in a
larger scale and consists of those points from A to B, with
Back up contract levels varying from 25 to 50% of the total
Back up necessity, and the portfolio of hydro and thermal
plants fully contracted.
800
1000
1200
1400
1600
1800
2000
1400 1500 1600 1700 1800 1900
E[CFPV] (MR$)
P
e
r
c
e
n
t
i
l
e

5
%


(
M
R
$
)
BACK UP EFFECT
NEW EFFICIENT
PORTFOLIOS
A
B
EFFICIENT PORTFOLIOS
WITHOUT BACK UP
Fig. 7. Efficient portfolios including Back Up (Back up price of 5R$/MWh)
In order to verify the influence of the Back up price on the
definition of new efficient portfolios and consequently on the
Back up contract level, another set of simulations were carried
out by varying the Back up contract prices from 5 to 30
R$/MWh, for the case of the portfolio total firm energy fully
contracted in the South subsystem. The results are illustrated
in Figure 8. It can be noted that as the price reduces the
number of efficient portfolios reduces and at a higher Back up
contract level. For example, for a Back up price of 5R$/MWh,
the efficient portfolios are those with Back up contract levels
varying from 25 to 50% of the maximum Back up necessity
while for a Back up price of 15R$/MWh, the level of these
contracts varies from 5 to 40% (see Table VII). For a Back up
price equal to zero, the number of efficient portfolios reduces
to only one with the Back up contract level equal to 100% of
the total bilateral contracts.
800
900
1000
1100
1200
1300
1400
1500
1600
1700
1800
1900
2000
2100
1400 1450 1500 1550 1600 1650 1700 1750 1800 1850 1900 1950 2000
E[CFPV] (MMR$)
P
e
r
c
e
n
t
i
l
e

5
%


(
M
R
$
)
EFFICIENT PORTFOLIOS
WITHOUT BACK UP
100%CONTRACTED
NEWEFFICIENT PORTFOLIOS
(BACKUP PRICE =30R$/MWh)
5R$/MWh
15R$/MWh
Fig. 8. Efficient portfolios (II)
TABLE VII
NEW EFFICIENT PORTFOLIOS
5 - - 1810.21 1376.04
10 - - 1809.15 1457.94
15 - - 1803.65 1519.72
20 - - 1793.56 1551.86
25 1852.27 1653.32 1780.24 1581.29
30 1851.13 1696.05 1764.69 1609.61
35 1848.23 1720.58 1747.39 1619.74
40 1843.67 1735.28 1728.42 1620.03
45 1838.05 1745.44 - -
50 1831.94 1754.5 - -
Back Up Level
(%)
E[CFPV]
(MR$)
Percentile 5%
(MR$)
Percentile 5%
(MR$)
Back Up Price = 5 R$/MWh Back Up Price = 15 R$/MWh
E[CFPV]
(MR$)
Figure 9 illustrates the original efficient portfolios without
Back up (A to D) and with Back up contracts at 30.00
R$/MWh (dashed lines). It is interesting to note that at this
price, the new efficient portfolios are those in dashed line from
A to E and those from E to D without Back up.
1200
1300
1400
1500
1600
1500 1550 1600 1650 1700 1750 1800 1850 1900
E[CFPV] (MMR$)
P
e
r
c
e
n
t
i
l
e

5
%


(
M
R
$
)
A
B
C
D
E
EFFICIENT PORTFOLIOS FOR A
BACK UP PRICE =30R$/MWh
EFFICIENT PORTFOLIOS
WITHOUT BACK UP
Fig. 9. Efficient portfolios (III)
VI. CONCLUSIONS
This paper described a methodology that defines the level
of Back up contract and pricing criteria taking into account the
risk aversion profile of the investor. The methodology is
applicable to portfolios of hydro and thermal plants operating
in different electrical subsystems (different spot prices).
The methodology is based on risk analysis techniques. The
system operation is simulated for various hydrological
scenarios and forced outages of the generating units are taken
into account.
The Back up contract level is defined according to the
hedging level desired by the investor based on the concept of
VaR and the monthly Back up necessity distribution.
It has been analyzed two pricing criteria: the Mean Value
and the Certainty Equivalent criteria. The latter takes into
account the risk aversion profile of the investor by using the
utility function concept. The results indicated that depending
on the degree of the investors risk aversion and the portfolio
cash flow present value distribution, the investor may consider
to pay more than the Back up price determined by the Mean
Value criterion.
An alternative to Back up contracts is to leave part of
portfolio total firm energy not contracted, i.e. establishing
bilateral contracts below the total firm energy of the hydro and
thermal plants and the remaining available energy negotiated
at the spot market. Based on the efficient portfolios concept,
the appropriate level of bilateral and Back up contracts can
determined according to the investors risk aversion.
VII. REFERENCES
[1] MAE, Energy Market Rules, 2002, Version 2.2b (in
Portuguese).
[2] A.C.G. Melo, R. Torres, R. P. Caldas, M. E. P. Maceira,
S. Ruffeil, F. Batista, M. L. V. Lisboa, Pricing Energy
Back up Contracts of Thermal Plants in Hydro-thermal
Systems, PSCC, Seville, Spain, 2002.
[3] M.E.P. Maceira, L. A. Terry, F. S. Costa, J . M. Damazio,
A. C. G. Melo, Chain of Optimization Models for Setting
the Energy Dispatch and Spot Price in the Brazilian
System, PSCC, Seville, Spain, 2002.
[4] D. G. Luenberger, Investment Science, Oxford
University Press, 1998, pp. 228-234.
[5] R. A. Brealey; S. C. Myers: Principles of Corporate
Finance, McGraw-Hill, 2000.
VIII. BIOGRAPHIES
Maria Luiza Viana Lisboa received her B.Sc. (1982) and M.Sc. (1986)
degrees from Brazil, where she practiced as an Electrical Engineer with
ELETROBRS until 1992. She received her Ph.D. fromthe University of
Canterbury (New Zealand) in 1996, and after that she worked at UMIST
(England) doing research in the area of power quality. From1999-2000 she
worked at ELETROBRS and since 2001 she has been with CEPEL, the
Brazilian Electric Power Research Center, working in the development of
projects and software in the areas of power systemexpansion planning under
uncertainties and energy commercialization.
Fabio Rodrigo Siqueira Batista obtained his B.Sc. degree in Civil
Engineering in 1999 fromFederal University of Esprito Santo, M.Sc. degree
in Finances and Investment Analysis in 2002 fromCatholic University of Rio
de J aneiro, and since 2002 is D.Sc. student at this same university. Since 2001
he has been with CEPEL, the Brazilian Electric Power Research Center,
working in projects related to investment analysis and risk management in
power systems. His general interest is in the Real Options Theory applied to
risk management.
Dbora D. J. Penna obtained her B.Sc. degree in Electrical Engineering from
Federal University of J uiz de Fora in 1997, and her MSc. degree from Federal
University of Rio de Janeiro in 2002. Since 1998 she has been with CEPEL,
the Brazilian Electric Power Research Center, working in the development of
projects in the areas of power system expansion planning and operation,
stochastic hydrological streamflow modeling and stochastic optimization.
Rodrigo Corra Torres obtained his B.Sc. degree in Civil Engineering from
Federal University of Rio de J aneiro in 1999, Certificate in Business
Administration fromUniversity of California, Berkeley in 2000 and since
2003 is M.Sc. student in Finances and Investment Analysis at the Catholic
University of Rio de Janeiro. Since 2000 he has been with CEPEL, the
Brazilian Electric Power Research Center, working in projects related to
investment analysis and risk management in power systems.
Roberto Pereira Caldas obtained his B.Sc. degree in Electronic Engineering
fromAeronautics Technology Institute (ITA/SP) in 1974 and M.Sc. degree in
1990 fromFederal University of Rio de Janeiro. Since 1983 he has been with
CEPEL, the Brazilian Electric Power Research Center, working in projects
related to metering of electrical energy, transfer of technology to industry and
proposition of tariff structure. Currently Mr. Caldas is the Head of the Power
Systems Economic and Financial Analysis Research Program.
Albert C. Geber de Melo received the B.Sc. Degree fromFederal University
of Pernambuco in 1983, and M.Sc. and D.Sc. Degrees from Catholic
University of Rio de Janeiro (PUC/RJ ) in 1986 and 1990 respectively, all in
Electrical Engineering. Since 1985 he has been with CEPEL, the Brazilian
Electric Power Research Center, working in the coordination and
development of projects and software in the areas of power systemreliability,
generation and transmission planning under uncertainties, efficient cost
allocation methods, economic and financial evaluation of projects including
risk analysis. He is also Associate Professor at the State University of Rio de
J aneiro. Dr. Melo is an active member of the IEEE and CIGR, and several
Brazilian Working Groups. Currently he is member of the Ministry of Mines
and Energy Working Group for defining and implementing the Brazilian
Power Sector Reform.