Optimizing Surplus Hydropower Sales Under Liquidity Constraints and Risk Management In The Free Contracting Market

This paper presents a mixed-integer linear programming (MILP) model for optimizing surplus hydropower sales in Brazil’s Free Contracting Market (ACL) under operational constraints and market volatility. The proposed framework integrates (i) dynamic liquidity constraints calibrated from historical trading activity, (ii) multi-horizon energy contracts (daily, monthly, quarterly, and semiannual), and (iii) risk management through Conditional Value at Risk (CVaR). Unlike related portfolio and contract-optimization models that typically neglect execution limits or adopt static volume caps, our formulation embeds time- and product-dependent liquidity envelopes and minimum-lot constraints in a single MILP with CVaR-based risk control. Computational experiments using 2,000 price scenarios quantify the trade-off between expected revenue and tail-risk mitigation across different values of the risk-aversion parameter λ.