"Serving the energy market" - Articles

Modeling and Forecasting Demand for Natural Gas of Retail Consumers

no@spam.com (Sergej Obžigailov) — Tue, 31 Jan 2012 06:22:24 CET

A thesis submitted for the degree of MSc of Econometrics. University of Amsterdam, August 2011. sergej.o [at] googlemail.com

Abstract
The thesis deals with fitting, modeling and forecasting of the retail consumer demand for natural gas. This is important and has a potential for numerous applications: gas portfolio risk management, keeping the storage system in balance, using it for valuation of swing contracts, gas consumption planning and other. Retail gas demand is weather sensitive and therefore can be better explained, compared to the demand from industries or power plants. A relationship between demand for the natural gas, weather and prices is of key focus. Such a relationship is studied by different tests and models for the demand of the natural gas, spot prices and weather are proposed. Econometric approaches are used to prove that spot or forward gas prices do not effect gas demand in a short-term horizon. Two models for residential natural gas demand are proposed. These are used to forecast demand for natural gas of residential consumers. Two weather models are considered and used to simulate gas demand. A comparison and discussion is provided. Data are obtained from three energy companies in the Netherlands and Belgium.

Valuation of Commodity-Based Swing Options

no@spam.com (Sergej Obžigailov) — Tue, 13 Dec 2011 14:42:05 CET

Co-author 1: Patrick Jaillet.
Co-author 2: Ehud I. Ronn.
Co-author 3: Stathis Tompaidis.

Abstract
In the energy markets, in particular the electricity and natural gas markets, many contracts incorporate exibility-of-delivery options, known as swing or take-or-pay options. Subject to daily as well as periodic constraints, these contracts permit the option holder to repeatedly exercise the right to receive greater or smaller amounts of energy.
We extract market information from forward prices and volatilities and build a pricing framework for swing options based on a one-factor mean-reverting stochastic process for energy prices which explicitly incorporates seasonal effects. We present a numerical scheme for the valuation of swing options calibrated for the case of natural gas.

Keywords
Swing option, take-or-pay option, mean-reverting stochastic process, seasonal effects in energy prices, natural gas

Link
http://web.mit.edu/jaillet/www/general/swing-last.pdf

Modelling dependence of extreme events in energy markets using tail copulas

no@spam.com (Sergej Obžigailov) — Tue, 13 Dec 2011 14:05:39 CET

Co-Author 1: Stefan Jäschke (RWE Supply & Trading GmbH)
Co-Author 2: Karl Friedrich Siburg (Fakultät für Mathematik TU Dortmund)
Co-Author 3: Pavel A. Stoimenov (Fakultät Statistik TU Dortmund)

Abstract
This paper studies the dependence of extreme events in energy markets. Based on a large data set comprising quotes of crude oil and natural gas futures, large co-movements of commodity returns are estimated and modeled. To detect the presence of tail dependence a new method based on the concept of tail copulas which accounts for different scenarios of joint extreme outcomes is applied. Moreover, it is shown that the common practice to fit copulas to the data cannot capture the dynamics in the tail of the joint distribution and, therefore, is unsuitable for risk management purposes.

The value of starting up the power plant

no@spam.com (Hans van Dijken) — Mon, 23 Aug 2010 11:18:58 CEST

Keywords: power plant valuation, VPP, plant start, dynamic programming, Monte Carlo simulations, least squares Monte Carlo
Published in: World Power
Publication year: 2010
Co-author 1: Dirk van Abbema, ING Bank
Co-author 2: Henk Sjoerd Los, KYOS Energy Consulting
Co-author 3: Cyriel de Jong, KYOS Energy Consulting

Gas-fired power plants provide the primary source of production flexibility in many power markets. An economically optimal use of the start-stop flexibility of gas plants is paramount to retrieving the maximum value from the asset. With the increasing penetration of wind power, this flexibility will become essential to balance the system. While starts and stops allow the owner to choose the production hours with the largest margin, they are also associated with various explicit and implicit costs. In this article we demonstrate the impact of various start-stop constraints and costs. This impact analysis is possible by applying advanced techniques for generating realistic Monte Carlo price simulations in combination with techniques for optimizing the production pattern.

An important insight that we gain is that different ways to limit starts lead to subtle differences in the actual use of the power plant and the corresponding value. We also find that the common modeling assumption of having perfect foresight about the future spark spreads may lead to a significant overstatement of plant value. This latter result contrasts our previous belief [Los et al, 2009], and statements of some other researchers [cf Clewlow et al, 2009] who claim that perfect foresight is a reasonable assumption. In particular, when there is a fixed limit to the number of allowed starts, as is common in many VPP contracts, uncertainty about future margins is definitely reducing plant value. We are able to show this result using the concept of least-squares Monte Carlo as applied to energy assets in e.g. Deng (2006, power plants) and De Jong and Boogert (2008; gas storage).

Cointegration between gas and power spot prices

no@spam.com (Cyriel de Jong) — Mon, 23 Aug 2010 10:44:56 CEST

Keywords: power prices, cointegration, regime switching, spot prices
Published in: The Journal of Energy Markets
Publication year: 2009, Volume 2, Number 3
Co-author 1: Stefan Schneider, EON Energy Trading

In this paper we show how cointegration can be applied to capture the joint dynamics of multiple energy spot prices. As an exemplary system we study the gas spot markets TTF, Zeebrugge and NBP, and additionally the power spot market APX, since these markets are strongly connected in terms of physical transportation and generation of power from gas. We develop a cointegrating multi-market model framework which is able to plausibly connect different single market spot price models. This is achieved by considering the mean-reverting spot-forward price spreads instead of spot prices only. Our analysis shows that the gas prices are strongly cointegrated, with a specific connection pattern of the markets, whereas cointegration of gas and power prices is on long-term forward price levels only.

A decade of "Rough" storage trading results in the UK NBP gas market

no@spam.com (Cyriel de Jong) — Mon, 26 Apr 2010 21:56:19 CEST

A decade of "Rough" storage trading results in the UK NBP gas market

Authors: Alexander Boogert, Christopher Clancy, Cyriel de Jong (KYOS Energy Consulting)

Date: April 2010

The backtest looks at the performance of different storage trading strategies in the UK NBP gas market. We assess a storage bundle mimicking the characteristics of the Rough storage, the largest in the UK. The backtest period covers 12 years, from 1997 until 2008. Every half year, the storage model calculates the expected storage value over the forthcoming 12 months. This 'projected' present value (ppv) is either the intrinsic value (based on the current forward curve), the rolling intrinsic value (based on changes in the forward prices over time), or the spot-based value. In the backtest, we then carry out the underlying trading strategies in the market over the front 12 months.

Our results indicate that the profitability of storage trading has varied largely over time, mainly due to variations in winter-summer spreads and price volatilities. When a trader would have relied on a pure spot trading strategy only, he would have done very well in some years, but in fact, often performed below expectation (the ppv being the expectation). This research discusses various explanations. However, a combination of a spot trading and a forward market hedging strategy completely changes the picture. The trader performance then matches closely with the expectation and he can be quite sure to realize both the intrinsic and the extrinsic value.

An Assessment of Benefits of Congestion Management Options for the Netherlands: A Case Study

no@spam.com (Sebastiaan Hers) — Tue, 20 Apr 2010 16:17:51 CEST

Keywords: Congestion Management, Re-Dispatch System, Welfare Impact, Locational Marginal Pricing; Published in: YEEES seminar 2010; Publication year: 2010; Co-author 1: Hers, J.S.; Co-author 2: Ozdemir, O.; Co-author 3: Kolokathis, C.; Co-author 4: Nieuwenhout, F.; Summary: By the end of 2008, a new policy regarding grid connection in the Netherlands was announced by the Dutch Minister of Economic Affairs. The policy implied renewed access to the grid for new generation capacity in congested regions, while anticipating the establishment of a required new congestion management system by the Minister of Economic Affairs. This study analyses the new connection policy in the Dutch power market and associated models for congestion management under consideration. In the first part of this paper a quantitative analysis of the net benefits of the new connection policy in the Netherlands is presented. Net benefits are calculated as the increase of consumer surplus and producers gross margin minus the cost of congestion. For all the scenarios considered, the benefits are shown to be roughly an order of magnitude higher than the congestion costs. Hence positive net benefits are expected to result from the implementation of the new connection policy. In the second part of this paper, four alternative designs for a congestion management system as laid down by the Dutch Ministry of Economic affairs are evaluated. The assessments were based on simulations using the COMPETES model, assuming a competitive wholesale market, efficient redispatch and both nonstrategic and strategic behaviour regarding congestion management.

Double-Sided Auction Mechanism Design in Electricity Based on Maximizing Social Welfare

no@spam.com (XIAOYAN ZOU) — Fri, 05 Feb 2010 14:31:34 CET

Keywords (max 10): electricity market; auction mechanism; social welfare contribution
Published in : Energy Policy
Production / Publication year (yyyy): 2009
Co-author 1 (last name, first name):
Co-author 2 (last name, first name):
Co-author 3 (last name, first name):
Summary / Abstract:An efficient electricity double-sided auction mechanism should control market power and enhance the social welfare of the electricity market. Based on this goal, the paper designs a new double-sided auction mechanism. In the new mechanism, the social welfare contribution of each participant plays a pivotal role, because this contribution is the critical factor in market clearing, payment settling, and transaction matching rules. In particular, each winner of the auction can gain transfer payments according to his contribution to social welfare in the electricity market, and this gives the mechanism the ability to control the market power of some participants. At the same time, this mechanism ensures that the market organizer balances his budget. We then conduct a theoretical and empirical analysis based on the Spanish electricity market. Both of the results show that compared to the uniform-pricing mechanism, the new mechanism can reduce market power of participants and enhance the social welfare of the electricity market.

Market implications large scale wind capacity

no@spam.com (Floris van Foreest) — Sat, 09 Jan 2010 12:15:44 CET

Keywords (max 10): Large scale wind capacity, grey production, price volatility, wind value implications
Published in (e.g. journal / magazine name, or blank):
Production / Publication year (yyyy): 2008
Co-author 1 (last name, first name): Thijs van den Berg
Co-author 2 (last name, first name):
Co-author 3 (last name, first name):
Summary / Abstract:The ambitioned integration of 10,000 MW Wind energy in the Dutch energy system will not only contribute to meeting the EU 2020 targets, but will also fundamentally alter the power market and underlying merit
order. This will have a serious impact on the utilization of grey production assets and price development on the APX and imbalance market. Furthermore, it is estimated that the amount of “wasted” wind power will increase as more wind capacity is built and the dispatch of grey assets is still driven by economic optimization and technological constraints. Consequently, the value outlook of wind deteriorates dramatically, which puts future investments in wind capacity in a different perspective.

Realistic power plant valuations

no@spam.com (Cyriel de Jong) — Thu, 27 Aug 2009 22:20:32 CEST

Published in WorldPower 2009

Authors: Henk Sjoerd Los, Hans van Dijken, Cyriel de Jong. KYOS Energy Consulting

The large investments in new power generation assets illustrate the need for proper financial plant evaluations. Traditional net present value (NPV) analysis disregards the flexibility to adjust production decisions to market developments, and thus underestimate true plant value. On the other hand, methods treating power plants as a series of spread options ignore technical and contractual restrictions, and thus overestimate true plant value. In this article we demonstrate the use of volatility and cointegration to incorporate market fundamentals and calculate dynamic, yet reasonable, spread levels and power plant values. A practical case study demonstrates how various technical and market constraints impact plant value. It also demonstrates that plant value may contain considerable option value, but 64% less than with the usual real option approaches. We conclude with an analysis of static and dynamic hedges affecting risk and return profiles