Wholesale electricity market designs in practice do not provide the marketparticipants with adequate mechanisms to hedge their financial risks. Demandersand suppliers will likely face even greater risks with the deepeningpenetration of variable renewable resources like wind and solar. This paperexplores the design of a centralized cash-settled call option market tomitigate such risks. A cash-settled call option is a financial instrument thatallows its holder the right to claim a monetary reward equal to the positivedifference between the real-time price of an underlying commodity and apre-negotiated strike price for an upfront fee. Through an example, weillustrate that a bilateral call option can reduce the payment volatility ofmarket participants. Then, we design a centralized clearing mechanism for calloptions that generalizes the bilateral trade. We illustrate through an examplehow the centralized clearing mechanism generalizes the bilateral trade.Finally, the effect of risk preference of the market participants, as well assome generalizations are discussed.
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