Hedging Strategy and Electricity Contract Engineering - IFOR

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20 The electricity market 1400 1300 1200 GWh 1100 1000 900 800 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Fig. 2.4: Monthly demand from October 1989 to September 2000 for a typical Swiss utility. 2200 2000 1800 1600 MWh 1400 1200 1000 800 600 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 Fig. 2.5: Hourly demand during September 2000 for a typical Swiss utility.
2.6 Special characteristics of electricity 21 demand of about one percent [RW99]. 2.6. Special characteristics of electricity Electricity is very different from traditional financial products, such as equities. It is also different from other commodities like oil and gas. We will here shortly recapitulate what makes electricity so special. There are no efficient ways to store electricity, the most efficient way is the use of the limited pump capacity that is installed in some of the hydro storage plants. This efficiency that is regarded very good for electricity storing, is still only around 70%. It is therefore fair to use the conventional wording and say that electricity is non-storable, especially as electricity in itself is not storable. The electrical energy actually has to be stored in other forms, such as chemical energy in batteries or potential energy in stored water. A very important effect of this non-storability is the fact that in a power system, supply has to equal demand at each instance of time. Further, electricity has to be consumed exactly at the same time as it is produced. Following from the non-storability, electricity supplied at different times of the day and in different places are not perfect substitutes, which is different from other commodity markets. Even natural gas, probably the most similar commodity, can be stored, not only in special storage facilities, but also in the pipeline network. Unlike the electricity grid, the gas network allows supply to differ from demand, since the gas pressure in the pipeline network can vary. No such mechanism is possible in the electricity grid, where an increased load, without a corresponding increase in supply would take power from the other units in the grid. This is not only a very challenging task for the engineers building and maintaining such power systems, but also affects the value of electricity in a deregulated market and complicates the modeling of electricity prices to a far more complex level than the modeling of, for example, stock prices. Another special feature is that electricity prices are not expected to follow an up-going trend, i. e. is not expected to generate any return due to risk. This is different from for example the equity market, where an up-ward trend is stipulated by CAPM [Sha64]. Unforeseen outages of generation assets, highly stochastic demand together
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 and 24: Chapter 2 The electricity market 2.
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: 2.5 Demand 19 2.5. Demand Compared
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
Page 75 and 76: l H xg yLihkjml f 3.5 The need for
Page 77 and 78: 3.5 The need for a new risk measure
Page 79 and 80: R S x GaRKV is convex and continuou
Page 81 and 82: R P 3.6 Multi period risk managemen
Page 83 and 84: “ “ “ 3.7 Valuation models 67
Page 85 and 86: 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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x k xëk x ìk Ü xë k 0Ü x ìk 0
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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 Ü r á 6.5 Analysis of optimal
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¢ é á 6.5 Analysis of optimal di
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u ¦ j Ü è è aëj ¦ bë j u j
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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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