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This paper introduces an application of financial risk management methods to the deregulated electricity markets. A framework for the Monte Carlo performance simulation of a power portfolio is presented. The optimal portfolio selection problem is addressed and a numerical method is implemented. Numerical results of simulation and optimization are presented in the Nordic electricity market. The results suggest that the risk management methods of the paper can be applied to the everyday electricity market practice.

We consider the valuation and rational exercise of irreversible investment opportunities in the presence of revenue uncertainty and delivery lags. In order to capture supply side market imperfections in the markets for investment goods, we assume that the lag depends on the revenue process faced by the investor. We show that such imperfections have a pronounced decelerating impact on rational investment demand as they may increase the value of waiting in excess of the exercise payoff even for projects which otherwise would be perceived as highly remunerative. We also consider the comparative static properties of the optimal investment policy and its value, and demonstrate that typically increased uncertainty decreases the investment incentives by increasing the value of waiting.