Abstract
This paper describes the structure and identification of a price model that is used in stochastic optimization of hydro operation and flexible contracts. The price model must be simple in order to be applicable in a stochastic optimization framework and the model should incorporate as much of the statistics of the price process as possible. Modelling of extremes is an important factor for the simulation capabilities of the optimisation models. The paper shows examples of simulated optimal operation of hydropower plants with the new price model. The paper also shows how the price model is used in a model that integrates hydro operation and financial hedging. In the forward market, prices of contracts with delivery several years ahead vary from one week to the next. In order to model this long-term uncertainty we have amended our spot price model.