The deregulated electricity market has changed the prerequisites for the different actors in the market, both electricity producing companies and electricity purchasers. Companies may purchase electricity directly on the spot market and/ or use different derivatives, such as forwards and futures, as hedging instruments. There are various strategies for acting in the market and this paper explores alternative strategies for a Swedish board mill where hedging contracts to secure the price of electricity cover part of the electricity demand. The remaining demand is purchased on the spot market or produced on site. The back-pressure turbines on site are subject to possible changes in order to determine whether it is profitable to make additional investments aimed at reducing costs.
Producing electricity close to the demand is a favourable alternative due to reduced losses in the grid and a lesser risk of power failure. Using back-pressure turbines on site meets these requirements and may also help to reduce the risk of power shortages. In certain situations, offering electricity production when there is a lack of electric power in the national grid is a possible alternative aimed at increasing income.
The result shows that the choice of hedging strategy strongly influences the possibility of reducing costs. It is also shown that the different hedging strategies depend on factors such as the amount of electricity produced on site and the spot price.