Investigating parameters of two-point hedging policy for operating a storage reservoir

Abstract

In the operation of a reservoir, at times it is rational not to meet the current demands in full even though there may be enough water to do so. The idea is to save some water to avoid large future shortages. Hedging policies are implemented to achieve this objective. Draper and Lund (2004) found that where hedging is desirable, a linear “two-point” hedging policy may be near optimal for a wide range of circumstances. This paper has examined the behaviour of two parameters of two-point hedging. It appears that in most situations, parameter A which determines when hedging should be triggered is likely to fall between 0.2 and 0.8. For parameter B which controls when hedging should be stopped is likely to be in the range 1.4–1.6. It was also found that the trigger point for commencement of hedging steadily falls as the correlation between demands and reservoir inflows decreases. Results of this study would help in applying simulation models to determine optimum values of the parameters of two-point hedging policy by narrowing the search region.