With the increase of extreme weather events and the penetration of distributed energy resources, electricity
retailers will encounter more risks at both transmission and distribution levels during the business operation
process. For risks at the transmission level, huge damages to the transmission lines and towers caused by extreme
events, like bushfires, ice storms, and flooding, will lead to power shortage. For risks at the distribution level,
demand variations in accordance with temperature change will result in energy procurement difficulty for the
retailers. In this paper, besides the normal bilateral contract, the insurance, the strangle weather derivatives, and
the energy storage system are implemented to hedge the risks at both the transmission and distribution levels.
Simulation results show that the proposed model ensures higher profits for the retailers in summer and winter
compared to the conventional model when there are no extreme events occurring. When there are extreme events
in both summer and winter, the proposed model incurs lower reduction of profits than that of the conventional
model. In brief, the overall profits of the retailer using the proposed hedging model are higher than the
convention model, and the overall profit variation of the conventional model is about 26% higher than the
proposed model. Furthermore, when the budget of the retailer is sufficient, all three hedging tools can be
invested. Whereas when the budget of the retailer is limited, the investment order should be insurance the first,
strangle weather derivatives the second, and energy storage system the third.