It Matters Which Way You Slice It: Risk Management for the 2005 Procurement Auction of Italy's Acquirente Unico

20 December 2005
By Hamish Fraser with Salvatore Lanza of the Acquirente Unico

The Acquirente Unico (AU), the single buyer in Italy responsible for supplying energy to retail consumers not eligible for competitive supply, asked NERA to assist in the development and implementation of mechanisms for risk-covering within its electricity purchasing strategy for 2005. In this article from The Electricity Journal, NERA Special Consultant Hamish Fraser and AU Portfolio Optimization Manager Salvatore Lanza discuss key risk management considerations concerning the 2005 procurement. The authors analyze the risk characteristics of three options, then conclude that the most appropriate contract form for the AU would be a one-way contract for differences arrangement in which an energy producer will receive a fixed price for capacity, less an adjustment factor to cover the difference between the actual market price of the energy at the time it is delivered and an agreed-upon fixed energy price. The authors also analyze the most appropriate parameters for and quantities of these contracts.