Review of wind futures by Gaussian and Lévy jump risks

Wind power futures, once a hedging tool in energy-related derivatives markets were discontinued due to low liquidity. However, recent increases in electricity price spreads have introduced new financing challenges for renewable energy projects in Europe, leading to heightened price risks and a renewed demand for such instruments. Also, the regulation on renewable electricity for renewable fuels of non-biological origin (RFNBO) — compliant hydrogen production poses a supply uncertainty risk to hydrogen developers. As both such project developers seek ways to mitigate these risks, this paper reviews the existing literature on modelling strategies for hedging wind power production risks. The review, based upon a structured literature review following vom Brocke et al. (2009), provides a comprehensive overview of arbitrage models incorporating seasonal elements and stochastic jump risks, as well as equilibrium pricing models. The variations and conclusions of these models are analyzed in the context of the altered market conditions in 2024. This analysis offers insights into the applicability of current models for pricing risk premia and identifies gaps under the evolving market realities.