Hedging Strategy and Electricity Contract Engineering - IFOR

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8 The electricity market Generation Generation is the essential activity of the electricity industry. It involves the conversion of chemical, atomic or mechanical energy to electricity. Traditionally, generation is carried out on a large scale, since there are considerable economic advantages associated with using large-scale equipment [Enr01]. However, in 1999 the cheapest new electricity plant used gas fired CCGT 2 technology, which has a low minimum efficient scale [BV99]. The main types of fuel used in electricity generation are coal, nuclear, gas, oil and hydro. Other plants may however use such forms of energy as solar, wind, biomass and waste power. Within most European electricity markets, there are a large number of power plants and it is thought that the market for generated wholesale bulk electricity is potentially competitive - and hence that active competition should be encouraged. This is because economics of scale in power stations are exhausted at low levels of output relative to the size of the market. Transmission Transmission is the bulk transport of electricity at high voltage. High voltages are used for transportation in order to minimize losses, since losses are inversely proportional to voltage. The voltage of the electricity produced by generators is therefore stepped up by use of transformers before entering the transmission grid. Transmission lines are very capital intensive, why installing new lines is associated with high capital cost. It is therefore uneconomic to duplicate them, as it leads to under-utilization. Electricity transmission systems exhibit significant economics of scale and are natural monopolies, since marginal cost prices may inadequately generate revenues needed for capital recovery. For this reason transmission is regarded as a monopoly. Electricity is then supplied to distribution networks via step-down transformers, lowering the voltage. Distribution Distribution is the transportation of power from the step-down transformers to consumers through successively lower voltage circuits. As with transmission, developing distribution networks is very costly and marginal cost prices may also in the distribution insufficiently create revenues needed for capital recovery, so it as well is regarded as a monopoly. 2 Combined cycle gas turbine (CCGT) and other plant types are further investigated in Chapter 4.
2.1 Overview 9 Generation ¥ Distribution ¦ Consum§ ption Transm§ ission Generation ¥ Träde Distribution ¦ Consum§ ption Generation ¥ Distribution ¦ Consum§ ption Fig. 2.1: Illustration of trading in wholesale competition. Supply Retailing or supply is the business of advertising, branding, contract bundling, metering and billing of electricity for end users. Electricity retailing has traditionally been bundled with distribution, but recently liberalization efforts have demonstrated that it is actually separable from distribution and hence competitive. Supply companies can purchase generated electricity and transmission services and compete on the basis of least-cost purchasing, metering and billing costs and quality of customer service. Trading In the regulated market no market mechanism was essentially established. Traditional utilities needed only to import electricity to their territory in the case of a power shortfall. As a result of deregulation and enforcement of competition at the level of generation and supply, the number of transactions has increased dramatically. To serve this increase in market activity, a number of power exchanges has emerged in the electricity markets. Trading of electricity refers to the business of facilitating exchange of wholesale electricity between generators and suppliers in order to meet contractual obligations. Trading within wholesale competition according to [HS96] is illustrated in Figure 2.1. Electricity contracts are not only traded at the mentioned power exchanges, but can also be traded on a bilateral basis. The ongoing liberalization of the electricity market and its consequences are discussed in Chapter 2.2. The supply side is investigated in Chapter 2.3, the transmission issues in Chapter 2.4 and the demand characteristics in Chapter 2.5. The special characteristics of electricity is summarized in Chapter 2.6. The, for the electricity market very characteristic, complex contracts are introduced in Chapter 2.7, followed by a discussion of power exchanges in Chapter 2.8. The effects of the peculiarities in the electricity market on the price
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 and 22: 1.3 Structure of the thesis 5 hedge
Page 23: Chapter 2 The electricity market 2.
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
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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
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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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õ õ 6.5 Analysis of optimal dispa
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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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