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

The wind power futures recently introduced on the German market fill the gap of a standardized product that addresses directly the volume risk in wind power trading. While the German wind power futures entail risk-reducing benefits for wind power generators generally speaking, it remains unclear the extent of these benefits across wind farms with different geographical locations. In this paper, we consider the wind utilization at 31 different locations in Germany, and 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 wind power futures at each wind site, we perform a
minimum variance hedge, and find that variance reductions can differ greatly depending on the geographical location. Further, different comparison studies reveal that the presence of 1) a negative risk premium in the wind power futures market and 2) upper tail dependence weaken the benefits of wind power futures for wind power generators.