Hedging as a Match-Maker: Unlocking Industrial Demand Flexibility for Renewable Energy Integration

Abstract

We analyze how long-term electricity hedging design affects industrial investments in load-shifting capacity. These investments enable flexible electricity consumption and play a crucial role in integrating variable renewable energy. We develop a theoretical model of flexibility investment by a risk-averse industrial firm facing uncertainty about renewable generation and electricity prices. We compare a conventional baseload hedge with a renewable energy profile (REP) hedge, a hedge with a fixed price but varying quantity proportional to renewable generation. The key difference is the consumer’s risk exposure and how it affects flexibility investment. Under the baseload hedge, flexibility provides an uncertain arbitrage value from shifting consumption across hours, so risk aversion reduces investment. Under the REP hedge, flexibility acts as a physical hedge against renewable profile risk by aligning the firm’s consumption with the contracted profile. This insurance value can increase flexibility investment under risk aversion. Numerical simulations illustrate the mechanism for realistic hourly price and renewable generation profiles. We further show that the REP hedge can reduce risk-adjusted total costs for flexible firms once baseload contract prices reflect observed profile risk premia. The results identify long-term hedging design as a potential channel to unlock industrial demand-side flexibility.