Managing Energy Risk: An Integrated View on Power and Other Energy Markets

451 Pages·2014·6.185 MB·English

by  Markus Burger, Bernhard Graeber, Gero Schindlmayr

Managing Energy Risk
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Managing Energy Risk
A Practical Guide for Risk Management in
Power, Gas and Other Energy Markets
Second Edition
Markus Burger
Bernhard Graeber
Gero Schindlmayr
Thiseditionfirstpublished2014
©2014MarkusBurger,BernhardGraeber&GeroSchindlmayr
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Contents
Preface xi
Acknowledgements xiii
1 EnergyMarkets 1
1.1 EnergyTrading 3
1.1.1 SpotMarket 3
1.1.2 ForwardsandFutures 4
1.1.3 CommoditySwaps 6
1.1.4 Options 6
1.1.5 DeliveryTerms 6
1.2 TheOilMarket 7
1.2.1 Consumption,ProductionandReserves 7
1.2.2 CrudeOilTrading 10
1.2.3 RefinedOilProducts 11
1.3 TheNaturalGasMarket 12
1.3.1 Consumption,ProductionandReserves 13
1.3.2 NaturalGasTrading 15
1.3.3 LiquefiedNaturalGas 19
1.4 TheCoalMarket 21
1.4.1 Consumption,ProductionandReserves 21
1.4.2 CoalTrading 23
1.4.3 Freight 26
1.5 TheElectricityMarket 27
1.5.1 ConsumptionandProduction 27
1.5.2 ElectricityTrading 31
1.5.3 ElectricityExchanges 38
1.6 TheEmissionsMarket 42
1.6.1 KyotoProtocol 42
1.6.2 EUEmissionsTradingScheme 45
1.6.3 FlexibleMechanisms 46
1.6.4 ProductsandMarketplaces 48
1.6.5 OtherEmissionsTradingSchemes 51
vi Contents
2 RenewableEnergy 55
2.1 TheRoleofRenewableEnergyinElectricityGeneration 55
2.1.1 HistoricalDevelopment 55
2.1.2 PoliticalTargets 58
2.1.3 Forecasts 59
2.2 TheRoleofLiquidBiofuelsintheTransportationSector 60
2.3 RenewableEnergyTechnologies 61
2.3.1 Hydropower 61
2.3.2 WindPower 66
2.3.3 SolarEnergy 69
2.3.4 GeothermalEnergy 71
2.3.5 Bioenergy 73
2.3.6 NotWidespreadRenewableEnergies 77
2.4 SupportSchemesforRenewableEnergy 78
2.4.1 Feed-InTariffs 80
2.4.2 NetMetering 83
2.4.3 ElectricUtilityQuotaObligationsandTradableCertificates 83
2.4.4 Auctions 85
2.4.5 Subsidies,InvestmentGrantsandTaxBenefits 86
2.5 KeyEconomicFactorsofRenewableEnergyProjects 87
2.5.1 TheProjectDeveloper’sPerspective 87
2.5.2 TheProjectInvestor’sPerspective 88
2.6 RisksinRenewableEnergyProjectsandtheirMitigation 90
2.6.1 ProjectDevelopmentRisks 90
2.6.2 ConstructionRisks 93
2.6.3 ResourceRisks 93
2.6.4 TechnicalRisks 96
2.6.5 MarketRisks 97
2.6.6 RegulatoryRisks 99
2.6.7 OtherOperationalRisks 100
3 RiskManagement 101
3.1 GovernancePrinciplesandMarketRegulation 102
3.2 MarketRisk 104
3.2.1 DeltaPosition 104
3.2.2 VarianceMinimisingHedging 110
3.2.3 Value-at-Risk 111
3.2.4 EstimatingVolatilitiesandCorrelations 120
3.2.5 Backtesting 123
3.2.6 Liquidity-AdjustedValue-at-Risk 123
3.2.7 Profit-at-RiskandFurtherRiskMeasures 127
3.3 LegalRisk 130
3.4 CreditRisk 134
3.4.1 CreditRating 137
3.4.2 QuantifyingCreditRisk 140
3.5 LiquidityRisk 144
3.6 OperationalRisk 146
Contents vii
4 RetailMarkets 151
4.1 InteractionofWholesaleandRetailMarkets 151
4.2 RetailProducts 155
4.2.1 Fixed-PriceContracts 155
4.2.2 IndexedContracts 156
4.2.3 FullServiceContracts 157
4.2.4 PartialDeliveryContracts 157
4.2.5 PortfolioManagement 158
4.2.6 SupplementaryProducts 159
4.3 Sourcing 160
4.3.1 SourcingFixed-PriceContracts 160
4.3.2 SourcingIndexedContracts 161
4.3.3 SourcingB2CContracts 162
4.4 LoadForecasting 163
4.5 WeatherRiskinGasRetailMarkets 165
4.5.1 WeatherDerivatives 168
4.6 RiskPremiums 172
4.6.1 Risk-AdjustedReturnonCapital 174
4.6.2 PriceValidityPeriod 174
4.6.3 StructuringFeeandBalancingEnergy 175
4.6.4 CreditRisk 176
4.6.5 VolumeandPriceProfileRisk 177
4.6.6 OperationalRisk 181
4.6.7 RiskPremiumSummary 182
5 EnergyDerivatives 185
5.1 Forwards,FuturesandSwaps 186
5.1.1 ForwardContracts 186
5.1.2 FuturesContracts 189
5.1.3 Swaps 191
5.2 CommodityForwardCurves 192
5.2.1 InvestmentAssets 194
5.2.2 ConsumptionAssetsandConvenienceYield 194
5.2.3 TheMarketPriceofRisk 196
5.3 “PlainVanilla”Options 197
5.3.1 ThePut–CallParityandOptionStrategies 198
5.3.2 Black’sFuturesPriceModel 200
5.3.3 OptionPricingFormulas 200
5.3.4 HedgingOptions:The“Greeks” 202
5.3.5 ImpliedVolatilitiesandthe“VolatilitySmile” 208
5.3.6 Swaptions 210
5.4 American,BermudanandAsianOptions 212
5.4.1 AmericanandBermudanOptions 212
5.4.2 AsianOptions 213
5.5 Multi-UnderlyingOptions 216
5.5.1 BasketOptions 216
5.5.2 SpreadOptions 218
5.5.3 QuantoandCompositeOptions 221
viii Contents
5.6 ModellingSpotPrices 224
5.6.1 PricingSpotPriceOptions 226
5.6.2 GeometricBrownianMotionasSpotPriceModel 231
5.6.3 TheOne-FactorSchwartzModel 237
5.6.4 TheSchwartz–SmithModel 241
5.7 StochasticForwardCurveModels 246
5.7.1 One-FactorForwardCurveModels 247
5.7.2 ATwo-FactorForwardCurveModel 249
5.7.3 AMulti-FactorExponentialModel 251
6 StochasticModelsforElectricityandGas 253
6.1 DailyandHourlyForwardCurveModels 253
6.1.1 DailyPriceForwardCurveforGas 255
6.1.2 HourlyPriceForwardCurveforElectricity 257
6.2 StructuralElectricityPriceModels 265
6.2.1 TheSMaPSModel 266
6.2.2 TheMulti-CommoditySMaPSmodel 269
6.2.3 Regime-SwitchingModels 272
6.2.4 VirtualPowerPlants 278
6.3 StructuralGasPriceModels 281
6.3.1 NaturalGasPriceModels 281
6.3.2 SwingOptionsandGasStorage 286
6.3.3 Least-SquaresMonteCarloMethod 291
7 FundamentalMarketModels 301
7.1 FundamentalPriceDriversinElectricityMarkets 301
7.1.1 DemandSide 302
7.1.2 SupplySide 306
7.1.3 Interconnections 313
7.2 EconomicPowerPlantDispatch 313
7.2.1 ThermalPowerPlants 315
7.2.2 HydropowerPlants 322
7.2.3 OptimisationMethods 325
7.3 MethodologicalApproaches 335
7.3.1 MeritOrderCurve 335
7.3.2 OptimisationModels 347
7.3.3 SystemDynamics 353
7.3.4 GameTheory 357
7.4 RelevantSystemInformationforElectricityMarketModelling 366
7.4.1 DemandSide 366
7.4.2 SupplySide 367
7.4.3 TransmissionSystem 370
7.4.4 HistoricalDataforBacktesting 371
7.4.5 InformationSources 371
7.5 ApplicationofElectricityMarketModels 372
7.6 GasMarketModels 374
7.6.1 DemandSide 375
7.6.2 SupplySide 376