On the spatial hedging effectiveness of German wind power futures for wind power generators

The wind power futures (WPF) recently introduced on the German market fill the gap of a standardized product that directly addresses the volume risk in wind power trading. While, generally speaking, German WPF entail risk-reducing benefits for wind power generators, the extent of these benefits across wind farms with different geographical locations remains unclear. In this paper, we consider the wind utilization in thirty-one different locations in Germany. For each site, we propose a copula model for the joint behavior of the site-specific wind index and the overall German wind index. Our results indicate that static mixture copulas are preferred to the stand-alone copula models usually employed in the economic literature. Further, we find evidence of asymmetric dependence and upper tail dependence. To quantify the benefits of WPF at each wind site, we perform a minimum variance hedge and find that variance reductions can differ greatly depending on the geographical location. Different comparison studies reveal that the presence of (1) a negative risk premium in the WPF market and (2) upper tail dependence weaken the benefits of WPF for wind power generators.