TY - JOUR T1 - Volumetric Risk Hedging Strategies and Basis Risk Premium for Solar Power JF - The Journal of Alternative Investments SP - 35 LP - 47 DO - 10.3905/jai.2020.1.099 VL - 23 IS - 1 AU - Takashi Kanamura Y1 - 2020/06/30 UR - https://pm-research.com/content/23/1/35.abstract N2 - This article studies volumetric risk hedging strategies for solar power with a twofold proposal of temperature-based and solar power generation–based models for solar power derivatives. It discusses the basis risk arising from a solar power volumetric risk hedge with temperature. Using the two models, the author designs and prices call options written on the accumulated non-cooling-degree days and the accumulated low solar power generation days for hedging cool summer risk, respectively, under the good-deal bounds. Using empirical studies of Czech solar power generation and Prague temperature, the author estimates the models’ parameters and numerically obtain basis risk premiums, that is, solar power generation–based call option prices minus temperature-based call option prices. Results show that premiums increase with temperature up to 25°C and decrease with temperature when it is higher than 25°C. This is consistent with the relationship between solar power generation and temperature. Above 25°C, the relationship is close to linear because of the offsetting effects of increased solar radiation and decreased solar panel efficiency.TOPICS: ESG investing, emerging, options, performance measurementKey Findings• We examine hedging strategies for solar power’s volumetric risk in cool summers with two call options priced under good-deal bounds using temperature-based and solar power generation—based models and discuss the basis risk from the temperature risk hedge.• Empirical studies using Czech solar power generation and Prague temperature show that the basis risk premiums increase with temperature up to 25°C and decrease with temperature over 25°C.• The latter is consistent with the relationship between solar power generation and temperature because above 25°C, the relationship is close to linear from the offsetting effects of increased solar radiation and decreased solar panel efficiency. ER -