Managing Energy Risk E-Book

Markus Burger

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Series
• Sprache: Englisch

Seitenzahl: 850

Veröffentlichungsjahr: 2014

Beschreibung

An overview of today's energy markets from a multi-commodity perspective As global warming takes center stage in the public and private sectors, new debates on the future of energy markets and electricity generation have emerged around the world. The Second Edition of Managing Energy Risk has been updated to reflect the latest products, approaches, and energy market evolution. A full 30% of the content accounts for changes that have occurred since the publication of the first edition. Practitioners will appreciate this contemporary approach to energy and the comprehensive information on recent market influences. A new chapter is devoted to the growing importance of renewable energy sources, related subsidy schemes and their impact on energy markets. Carbon emissions certificates, post-Fukushima market shifts, and improvements in renewable energy generation are all included. Further, due to the unprecedented growth in shale gas production in recent years, a significant amount of material on gas markets has been added in this edition. Managing Energy Risk is now a complete guide to both gas and electricity markets, and gas-specific models like gas storage and swing contracts are given their due. The unique, practical approach to energy trading includes a comprehensive explanation of the interactions and relations between all energy commodities. * Thoroughly revised to reflect recent changes in renewable energy, impacts of the financial crisis, and market fluctuations in the wake of Fukushima * Emphasizes both electricity and gas, with all-new gas valuation models and a thorough description of the gas market * Written by a team of authors with theoretical and practical expertise, blending mathematical finance and technical optimization * Covers developments in the European Union Emissions Trading Scheme, as well as coal, oil, natural gas, and renewables The latest developments in gas and power markets have demonstrated the growing importance of energy risk management for utility companies and energy intensive industry. By combining energy economics models and financial engineering, Managing Energy Risk delivers a balanced perspective that captures the nuances in the exciting world of energy.

Leseprobe

For other titles in the Wiley Finance series, please see www.wiley.com/finance

Managing Energy Risk

A Practical Guide for Risk Management in Power, Gas and Other Energy Markets

Second Edition

Markus Burger

Bernhard Graeber

Gero Schindlmayr

This edition first published 2014 © 2014 Markus Burger, Bernhard Graeber & Gero Schindlmayr First edition published 2007 by John Wiley & Sons, Ltd.

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ISBN 978-1-118-61863-9 (hardback) ISBN 978-1-118-61862-2 (ebk) ISBN 978-1-118-61858-5 (ebk) ISBN 978-1-118-61850-9 (obk)

Cover design: Wiley

Contents

Preface

Acknowledgements

Chapter 1: Energy Markets

1.1 Energy Trading

1.2 The Oil Market

1.3 The Natural Gas Market

1.4 The Coal Market

1.5 The Electricity Market

1.6 The Emissions Market

Notes

Chapter 2: Renewable Energy

2.1 The Role of Renewable Energy in Electricity Generation

2.2 The Role of Liquid Biofuels in the Transportation Sector

2.3 Renewable Energy Technologies

2.4 Support Schemes for Renewable Energy

2.5 Key Economic Factors of Renewable Energy Projects

2.6 Risks in Renewable Energy Projects and their Mitigation

Note

Chapter 3: Risk Management

3.1 Governance Principles and Market Regulation

3.2 Market Risk

3.3 Legal Risk

3.4 Credit Risk

3.5 Liquidity Risk

3.6 Operational Risk

Note

Chapter 4: Retail Markets

4.1 Interaction of Wholesale and Retail Markets

4.2 Retail Products

4.3 Sourcing

4.4 Load Forecasting

4.5 Weather Risk in Gas Retail Markets

4.6 Risk Premiums

Chapter 5: Energy Derivatives

5.1 Forwards, Futures and Swaps

5.2 Commodity Forward Curves

5.3 “Plain Vanilla” Options

5.4 American, Bermudan and Asian Options

5.5 Multi-Underlying Options

5.6 Modelling Spot Prices

5.7 Stochastic Forward Curve Models

Note

Chapter 6: Stochastic Models for Electricity and Gas

6.1 Daily and Hourly Forward Curve Models

6.2 Structural Electricity Price Models

6.3 Structural Gas Price Models

Chapter 7: Fundamental Market Models

7.1 Fundamental Price Drivers in Electricity Markets

7.2 Economic Power Plant Dispatch

7.3 Methodological Approaches

7.4 Relevant System Information for Electricity Market Modelling

7.5 Application of Electricity Market Models

7.6 Gas Market Models

7.7 Market Models for Oil, Coal and CO

2

Markets

7.8 Asset Investment Decisions

Notes

Appendix: Mathematical Background

A.1 Econometric Methods

A.2 Stochastic Processes

A.3 Option Pricing Theory

References

Index

End User License Agreement

List of Tables

Chapter 1

Table 1.1

Table 1.2

Table 1.3

Chapter 2

Table 2.1

Chapter 3

Table 3.1

Table 3.2

Table 3.3

Table 3.4

Table 3.5

Table 3.6

Table 3.7

Table 3.8

Chapter 4

Table 4.1

Table 4.2

Table 4.3

Table 4.4

Chapter 5

Table 5.1

Chapter 6

Table 6.1

Table 6.2

Table 6.3

Table 6.4

Table 6.5

Table 6.6

Table 6.7

Table 6.8

Table 6.9

Table 6.10

Table 6.11

Chapter 7

Table 7.1

Table 7.2

Table 7.3

Table 7.4

Table 7.5

Table 7.6

Table 7.7

Guide

Cover

Table of Contents

Preface

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Preface

Reliable energy supply is essential for our civilised society. With constantly growing worldwide energy demand it is one of the main challenges for the 21st century to secure sufficient energy supply at reasonable costs in alignment with environmental and climate protection targets. Incidents like increasing oil prices, climate change, the Fukushima nuclear accident or shale gas production have attracted a high degree of public, international media and political attention in the energy sector. However, suggested answers for safe future energy supply differ broadly in international comparison.

Until the mid-20th century, energy demand was almost exclusively met by domestic energy sources. Since then fossil fuels have become traded internationally and interconnected markets for electricity have evolved. Liberalisation of energy markets in many regions of the world led to new electricity and gas markets with increasing trading volumes. With the introduction of emissions trading for sulphur dioxide (SO2) in the United States and for carbon dioxide (CO2) in Europe, new markets with specific characteristics have been created.

Besides energy companies, large consumers and emitters, banks and other traders participate in growing energy markets. Commodities are also increasingly recognised as an important asset class in fund management that can improve the portfolio risk profile. However, energy and emissions markets are often described as unstable and erratic. They are characterised by a multitude of complex products, high price volatility and changing correlations between each other.

The financial crisis of 2007/8 has shown that for market participants, adequate risk management is essential. Risk management must cover all aspects – such as market, credit, liquidity and operational risk – and has to reflect the specifics of the relevant markets adequately. Such specifics also include the interaction between different energy markets. This book pursues a multi-commodity approach and addresses electricity, gas, coal, oil and CO2 emissions.

Since the financial crisis, increased regulation of energy markets has broken the earlier trend of market liberalisation in many countries. On the one hand, this is caused by the interaction of financial markets and energy markets in terms of products and market participants. As a result, energy traders now have to comply with new regulatory requirements originally targeted at financial institutions. On the other hand, different political views on how to achieve ambitious renewable energy targets led to new market interventions and regulations. Furthermore, public concerns about the influence of speculators on commodity prices have fed discussions on further regulation. Increased regulation and market interventions provide new challenges for the energy industry that need to be taken into account in the risk management process.

One speciality of this book is to cover both energy economics approaches, including fundamental market models, and the financial engineering approaches commonly used in banks and other trading companies. One example of the combination of these approaches is the SMaPS electricity price model described in Chapter 6. This builds on stochastic price models similar to those used for financial markets but reflects the specific characteristics of electricity markets by using a merit order approach commonly found in fundamental electricity market models. As a consequence, this book addresses researchers and professionals from a technical background in energy economics as well as those with experience in financial mathematics or trading. Although the book introduces a wide range of theoretical concepts, its main focus is on applications within the energy business. As the best choice of model depends on the specific purpose, advantages and disadvantages of different modelling and risk management approaches are discussed throughout the book.

This second edition contains substantial new material to meet the requirements of the recent developments in energy markets. The main changes include:

The structure of the book has been altered to offer a more intuitive approach for readers with different interests. Chapters 1 and 2 give an overview and explain the fundamental principles of energy markets. Chapters 3 and 4 describe risk management and customer-oriented retail processes for energy companies. These chapters are particularly focused on practical use. Chapters 5 and 6 cover the valuation of derivatives and structured energy products. They require basic knowledge of financial mathematics, some of which is summarised in the Appendix. An alternative for the valuation of real assets is the use of fundamental models as explained in Chapter 7.

The growing influence of renewable energy is given much more space and a new and comprehensive chapter on renewable energy has been added (Chapter 2). This contains energy economic principles, value drivers and risks related to hydro, wind, solar, bio and further renewable energy sources.

The growing gas markets and their modelling approaches are described in more detail. Specific topics added to this second edition are how to build a price forward curve for natural gas, stochastic modelling of gas prices and valuation of gas storage and swing options.

The chapter on retail markets (Chapter 4) now contains a description of weather derivatives and their use for hedging gas retail contracts.

To meet new requirements after the financial crisis, extended risk management processes are discussed in more detail.

Acknowledgements

The realisation of this second edition involved inspiring teamwork, which we really enjoyed. Besides the authors, a number of people provided valuable contributions to this book for which we want to express our gratitude. First of all, we thank Guido Hirsch for his contributions regarding gas price models and weather derivatives. Guido is Head of Market Risk and Valuation Models at EnBW and thanks to Guido’s expertise the book could be expanded with respect to the recent developments in natural gas markets. Jan Müller has added a description of the multi-commodity SMaPS model, which formed part of his PhD thesis. Sven-Olaf Stoll has added refinements to the price forward curve for electricity. Both Jan and Sven-Olaf are experts in stochastic modelling at EnBW.

1Energy Markets

Despite a global sustainability trend including climate protection and more efficient use of energy, worldwide energy consumption will continue to grow over the coming decades (see Figure 1.1). Besides future economic growth, an important driver of global energy demand is policy commitments, such as renewable energy or energy efficiency targets. Depending on scenario assumptions, the average annual growth rate in energy consumption is estimated to be between 0.5% and 1.5% (International Energy Agency, 2012) until 2035, with significant regional differences. Most of the energy demand growth is expected to come from non-OECD countries, with China and India being the largest single contributors.

Figure 1.1 World energy demand. Source: International Energy Agency (2012).

The main primary energy source worldwide is oil, covering 32% of worldwide energy consumption (see Figure 1.2). Second are coal and natural gas, with a share of 27% (respectively 22%). Nuclear energy (6%) and renewables (13%) have a much smaller share. To meet the growing worldwide demand for energy, there will need to be an increase in energy supply from all primary energy sources. However, depending on the scenario, the share of oil and coal will diminish in favour of gas and renewable energy sources (Figure 1.2).

Figure 1.2 World primary energy sources. : International Energy Agency (2012).