Hydroassets Portfolio Management for Intraday Electricity Trading from a Discrete Time Stochastic Optimization Perspective

Hydro storage system optimization is becoming one of the most challenging tasks in Energy Finance. Following the Blomvall and Lindberg (2002) interior point model, we set up a stochastic multiperiod optimization procedure by means of a ”bushy” recombining tree that provides fast compu- tational results. Inequality constraints are packed into the objective function by the logarithmic barrier approach and the utility function is approximated by its second order Taylor polynomial. The optimal solution for the original problem is obtained as a diagonal sequence where the first diagonal dimen- sion is the parameter controlling the logarithmic penalty and the second is the parameter for the Newton step in the construction of the approximated solu- tion. Optimal intraday electricity trading and water values for hydroassets as shadow prices are computed. The algorithm is implemented in Mathematica.