Hedging Strategy and Electricity Contract Engineering - IFOR

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6 Introduction
Chapter 2 The electricity market 2.1. Overview The electricity industry’s basic function is to convert fuel and primary energy into electricity and transport it to customers. 1 Because it is very costly to store electricity, the electricity industry has to match supply with demand in real time. Unlike other businesses, like the gas industry, there is therefore no scope for suppliers to meet demand from stored reserves. The electricity industry can be divided into four main groups corresponding to the four-stage vertical interdependent process that is needed to produce and deliver electricity, namely: 1. Generation, i. e. electricity production. 2. Transmission, i. e. transport of electricity at high voltage. 3. Distribution, i. e. transport and delivery of electricity to customers. 4. Supply, i. e. retail. 1 The SI-unit of energy is joule [J]. One joule equals a constant power of one watt [W] for one second. In the electricity industry however, energy and power levels are typically very high, why the industry standard for energy is kilo watt hour [kWh], which corresponds to the energy stemming from a one hour constant power of 1000 watt. 1 MWh hence corresponds to 1000 kWh, 1 GWh to 1000 MWh and 1 TWh to 1000 GWh. The industry standard for power is consequently kW, MW and GW.
Page 1: Diss. ETH No. 14727 Hedging Strateg
Page 5 and 6: Abstract This thesis studies risk m
Page 7 and 8: Zusammenfassung Die vorliegende Sch
Page 9 and 10: Contents Acknowledgements ¡ ¢ ¡
Page 11 and 12: Contents xi 5.1 Overview . . . . .
Page 13 and 14: List of Figures 2.1 Illustration of
Page 15 and 16: List of Figures xv 7.6 Marginal val
Page 17 and 18: List of Tables 2.1 Spot market bid.
Page 19 and 20: Chapter 1 Introduction 1.1. Motivat
Page 21: 1.3 Structure of the thesis 5 hedge
Page 25 and 26: 2.1 Overview 9 Generation ¥ Distri
Page 27 and 28: 2.2 Liberalization of the electrici
Page 29 and 30: duction cost Marginal pro © 2.3 Su
Page 31 and 32: 2.4 Transmission costs 15 10 Peak l
Page 33 and 34: 2.4 Transmission costs 17 destinati
Page 35 and 36: 2.5 Demand 19 2.5. Demand Compared
Page 37 and 38: 2.6 Special characteristics of elec
Page 39 and 40: 2.7 Electricity contracts 23 tions.
Page 41 and 42: 0& K $ 0& K K % + $ 2.7 Electricity
Page 43 and 44: 2.7 Electricity contracts 27 2.7.2.
Page 45 and 46: 04 04 2.7 Electricity contracts 29
Page 47 and 48: 2.8 Power exchanges and pricing mec
Page 49 and 50: 2.8 Power exchanges and pricing mec
Page 51 and 52: S 0 eH aIKJ 2.9 Price dynamic 35 To
Page 53 and 54: 2.9 Price dynamic 37 400 2000 350 1
Page 55 and 56: 2.9 Price dynamic 39 simple sinus f
Page 57 and 58: 2.9 Price dynamic 41 1800 1800 1600
Page 59 and 60: 2.10 Summary 43 To deal with the un
Page 61 and 62: Chapter 3 Risk management 3.1. Over
Page 63 and 64: 3.3 The risks in the electricity ma
Page 65 and 66: 3.3 The risks in the electricity ma
Page 67 and 68: 3.4 Traditional risk management mod
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3.4 Traditional risk management mod
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l H xg yLihkjml f 3.5 The need for
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3.5 The need for a new risk measure
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R S x GaRKV is convex and continuou
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R P 3.6 Multi period risk managemen
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“ “ “ 3.7 Valuation models 67
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3.7 Valuation models 69 storability
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3.7 Valuation models 71 by introduc
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“ 3.7 Valuation models 73 formula
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Chapter 4 Contract engineering 4.1.
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4.2 Gas turbine 77 2000 1800 1600 1
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4.2 Gas turbine 79 220 200 Capped l
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4.3 Hydro storage plant 81 facilita
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¢ 4.3 Hydro storage plant 83 I k L
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x k xœk x «k š xœk 0 š x «k 0
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4.4 Coal plant and oil plant 87 4.4
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4.4 Coal plant and oil plant 89 cor
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4.5 Nuclear plant 91 of 1000 MW. Ov
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4.7 All production plants 93 possib
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4.8 Transmission lines 95 Unit type
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4.9 Real option theory 97 The scien
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4.10 Value of different production
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4.12 Summary 101 like the capped sp
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Chapter 5 Hedging strategies 5.1. O
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È È È È È 5.2 Traditional hedg
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É È É È Ì 5.2 Traditional hedg
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5.3 Relevance for electricity hedgi
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5.4 Best Hedge 111 that the expecte
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5.4 Best Hedge 113 that they alread
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Chapter 6 Power portfolio optimizat
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6.3 Power portfolio optimization in
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6.3 Power portfolio optimization in
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6.4 Modeling of plants and their op
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gìi Û S í SÜ D í DÜ I a í I
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õ õ 6.5 Analysis of optimal dispa
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õ õ õ á á 6.5 Analysis of opti
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6.6 Power portfolio optimization wi
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è á 6.6 Power portfolio optimizat
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ö 6.6 Power portfolio optimization
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ö Ü 6.6 Power portfolio optimizat
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ö S kã j á 6.6 Power portfolio o
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¢ ¢ 6.6 Power portfolio optimizat
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î yú1 î é yú1 á ¢ 6.6 Power
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6.7 Summary 167 opportunity set wou
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Chapter 7 Case study In this chapte
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171 3200 140 3000 2800 120 2600 240
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S7 D7 min 8 0 if S i or D p otherwi
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175 Production Spot price Demand [C
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7.1 Efficient frontier 177 lG x 6 9
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7.2 Spot position 179 of the old po
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7.3 Hedging value of water 181 The
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7.4 Value decomposition 183 expecte
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MWh CHF/ P 7.4 Value decomposition
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7.6 Summary 187 2500 2000 Dispatch
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7.6 Summary 189 We have quantified
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Chapter 8 Conclusions The special c
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a4q V a4q G 1 V H a4q 6 Appendix A
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8 _ 195 Proof The results follow im
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g b4i d G9:7j b4 j G 1 9j7j H b4 j
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Ax 3 V AxK1 G 1 V H AxK2 V b 1 G 1
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Bibliography [ABA98] [AD80] [ADEH97
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Bibliography 203 [BS73] [BS98] [BT0
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Bibliography 205 [GR92] H. Gravelle
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Bibliography 207 [Mer76] R. C. Mert
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Bibliography 209 [SC89] [Sch90] [Sc
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Curriculum Vitae Personal Data Name
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Hedging Strategy and Electricity Contract Engineering - IFOR

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