A portfolioTheory Approach for the Power Supply contracts to Paraguayan Electric System by Itaipu

Abstract

Itaipu is a binational enterprise undertaking Paraguay and Brazil. The electrical power produced by Itaipu hydroelectric power plant is sold to Administración Nacional de Electricidad (ANDE) from Paraguay, and Eletrobras from Brazil, through an annual contract. The main source of power supply for Paraguay’s Electrical Power System is the Itaipu Hydroelectric Power Plant. Historically, Itaipu produces more power than the expected and sells this surplus power for lower prices than the contract prices. However, surplus power depends on the natural inflows, occurring more often on dry periods of the year and it is possible that surplus power won’t occur or would be less than expected. In this context, ANDE has two possible options of contracts with Itaipu: an ex-ante risk-free option through an annual contract and a short-term option, an ex-post risky option at lower prices. A third option for the supply to meet the demand is through the cession of Power Contracted by Eletrobras. This option can be very expensive due to the high cost when used for a period greater than 4 hours on the same day. For this problem, it is proposed a mean-variance model for ANDE’s portfolio optimization, obtaining an efficient frontier to describe which portfolio options achieve the lower costs for each level of risk. The model indicates the optimal decision, based on monthly power contracts that would lead to best economic achievements.