"Serving the energy market" - Articles - Risk management

Volunteering to fight global warming

no@spam.com (Anne Ku) — Sat, 29 Dec 2007 14:13:08 CET

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Published in: Global Energy Business
Publication year: 2001

Most energy companies know that governments will—sooner or later—impose limits on their emissions of greenhouse gases. A small but growing number— including two oil majors and some big U.S. utilities—are already preparing for the inevitable. They are taking voluntary steps to reduce the amounts of CO2 and pollutants their activities generate, and experimenting with market-based and internal programs for trading emissions credits for multiple greenhouse gases. Such proactive approaches do more than lend needed certainty to corporate environmental planning; they also promise to give their ‘green’ adopters a competitive edge, in the form of early practical experience with emissions measurement and trading and compliance risk management.

Electricity price modelling for profit at risk management

no@spam.com (Jacob Lemming) — Fri, 21 Dec 2007 14:12:52 CET

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Published in:
Publication year:

In liberalized electricity markets power producers face a wide range of decision problems that require modelling of electricity prices as a crucial input. In this chapter we look at risk management decisions and specifically on how electricity price modelling affects the optimal solution to a relatively simple risk management decision problem

Pieces of Power

no@spam.com (Alain McNee) — Mon, 17 Dec 2007 15:01:58 CET

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Published in: Erisk
Publication year: 2001

The gap between market risk management and the risk management of major assets is slowly closing in the energy markets, with implications for enterprise risk management.

A Multi-Factor Model for Energy Derivatives

no@spam.com (Chris Strickland) — Mon, 03 Dec 2007 17:42:49 CET

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Published in:
Publication year: 1999
Co-author 1: Les Clewlow

In this paper we develop a general framework for the risk management of energy derivatives. The framework is designed to be consistent not only with the market observable forward price curve but also the volatilities and correlations of forward prices. We show how these volatilities and correlations can be estimated from the market and incorporated into the model in order to price a wide range of energy derivatives. Our framework extends and synthesises the results of Amin and Jarrow [1991a,b], Cortazar and Schwartz [1994], Amin, Ng and Pirrong [1995], Schwartz [1997], and Hilliard and Reis [1998]. We demonstrate the application of our framework to oil and gas futures data from the New York Mercantile Exchange and give numerical results for the pricing of European Caps and Swaptions.

Risk management in a large rural electrification programme

no@spam.com (Subhes C. Bhattacharyya) — Thu, 01 Nov 2007 15:36:10 CET

Keywords: Rural electrification, risk identification, risk mapping, risk mitigation.
Published in:
Publication year: 2005
Co-author 1: Prasanta K. Dey

Although rural electrification projects and programs have been implemented in many countries, they suffered from design, planning, implementation and operational flaws. This paper presents a risk management framework in order to manage large scale development projects effectively. The proposed framework first identifies, with the involvement of the stakeholders, the risk factors of a rural electrification programme at three different levels. Subsequently it develops a qualitative risk prioritizing scheme through probability and severity mapping and provides mitigating measures for most vulnerable risks. The study concludes that the hierarchical risk management approach provides an effective framework for managing large-scale rural electrification program.

Managing the spark spread

no@spam.com (Cyriel de Jong) — Thu, 01 Nov 2007 11:58:35 CET

Keywords: power plant, real options, spark spread, hedging, valuation, optimal operation
Pulished in:
Publication year: 2003
Co-author 1: Kasper Walet

In this paper we describe the decision problem of the manager of a power plant. The plant manager needs to decide on the production levels of the facility based on current and future spark spreads and production costs. Furthermore, decisions need to be made on the optimal hedging strategy with tradable financial contracts in the electricity output and the input fuel. We show that optimal production decisions and optimal financial contracting decisions depend largely on the flexibility with which the facility can be operated, and thus on the level of volatility that may be exploited. On one side of the spectrum, so-called baseload plants will be generating power almost continuously, and hedging financial risks is done with tradable long-term forward contracts, which yields a direct value based on option theory (Margrabe, 1978). On the other side of the spectrum, so-called peaking plants will be generating power only in short periods of high demand, and hedging financial risks is only possible to a very limited extent, since financial contracts on future short-term delivery periods are barely traded. As long as the risk preferences of the plant owner are taken into account, real option valuation and optimal operating decisions can however be obtained for peaking plants by simulating the appropriate market prices in combination with the least squares Monte Carlo simulation approach (Carriere, 1996; Longstaff and Schwartz, 2001).

To store or not to store

no@spam.com (Cyriel de Jong) — Thu, 01 Nov 2007 11:40:55 CET

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Published in: Energy risk
Publication year: 2003
Co-author 1: Kasper Walet

Here we describe the optimal operation and valuation of gas storage based on a real option methodology. Using Zeebrugge gas prices as a practical example, Cyriel de Jong and Kasper Walet clarify the optionality in gas storage, analyse its valuation and discuss hedging strategies to secure part of the storage value

Valuation and risk management in the Norwegian electricity market

no@spam.com (Petter Bjerksund) — Mon, 01 Oct 2007 11:01:23 CEST

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Published in:
Publication year: 2000
Co-author 1: H. Rasmussen
Co-author 2: G. Stensland

The purpose of this paper is two-fold: Firstly, we analyze option value approximation of traded options in the presence of a volatility term structure. The options are identified as: European (written on the forward price of a future flow delivery); and (ii) Asian. Both types are in fact written on (arithmetic) price averages. Secondly, adopting a 3-factor model for market risk which is compatible with the valuation results, we discuss risk manage- ment in the electricity market within the Value at Risk concept. The analysis is illustrated by numerical cases from the Norwegian electricity derivatives market.

Pricing of electricity swing options

no@spam.com (Jussi Keppo) — Thu, 27 Sep 2007 16:58:20 CEST

Keywords: Derivative pricing, electricity market, load pattern
Published in:
Publication year: 2002

We consider the pricing of electricity swing options that hedge the electricity price risk and also partly the risks in the option owner's load pattern. The swing derivative sets boundaries for the purchased power and energy and it specifies the price at which the option owner can buy energy. The name swing option comes from the fact that the power usage is allowed to swing between the lower and upper boundaries. We show that the swing options can be priced and hedged by using regular electricity forwards and call options.

Pricing and hedging in incomplete markets

no@spam.com (Peter Carr) — Thu, 27 Sep 2007 11:25:23 CEST

Keywords: Risk management; State price density; Unique Martingale measure; Complete markets; Option pricing
Published in: Journal of financial economics
Publication year: 2001
Co-author 1: Helyette Geman
Co-author 2: Dilip B. Madan

We present a new approach for positioning, pricing, and hedging in incomplete markets that bridges standard arbitrage pricing and expected utility maximization. Our approach for determining whether an investor should undertake a particular position involves specifying a set of probability measures and associated floors which expected payoffs must exceed in order for the investor to consider the hedged and financed investment to be acceptable. By assuming that the liquid assets are priced so that each portfolio of assets has negative expected return under at least one measure, we derive a counterpart to the first fundamental theorem of asset pricing. We also derive a counterpart to the second fundamental theorem, which leads to unique derivative security pricing and hedging even though markets are incomplete. For products that are not spanned by the liquid assets of the economy, we show how our methodology provides more realistic bid–ask spreads. r 2001 Published by Elsevier Science S.A.