  Load-serving entities which procure electricity from the wholesale
electricity market to service end-users face significant quantity and price
risks due to the volatile nature of electricity demand and quasi-fixed
residential tariffs at which electricity is sold. This paper investigates
strategies for load serving entities to hedge against such price risks.
Specifically, we compute profit-maximizing portfolios of forward contract and
call options as a function of the uncertain aggregate user demand. We compare
the profit to the case of Demand Response, where users are offered monetary
incentives to temporarily reduce their consumption during periods of supply
shortages. Using smart meter data of residential customers in California, we
simulate optimal portfolios and derive conditions under which Demand Response
outperforms call options and forward contracts.
