Electricity Trading and Hedging

  • ID: 220496
  • Book
  • 118 Pages
  • Incisive Media
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A research report from an expert consultancy looking at the range of issues facing firms wishing to hedge in the new power markets

- Shows decision-makers how they can build a rationale for hedging and trading in the new power markets in the US and Europe

- Covers breaking market issues such as the role and risks of trading power on the internet and the implications of the July 1999 power price spike
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ExecutiveSummary v

Preface vii

Introduction 1
What is price volatility? 3
The fundamentals of electricity: drivers of electricity demand 5
The fundamentals of electricity: supply and generation capacity 6
Joining demand and supply: the dispatch process underderegulation 7
What is risk management in electricity markets? 8

How Electricity Markets Work 13
Failure of futures markets to dominate 13
Varied menu of traded assets 14
Transmission services and traded power 14
The menu of electricity transactions 15
Discos and RFPs for standard offer service 15
The new long-term contract 17
Medium and short-term contracts 19
The instruments of electricity hedging: forwards, futures,options, weather derivatives and insurance 20
Futures 20
Exchange-traded versus OTC options markets 23
Over-the-counter and through the Web 24
Weather derivatives 27
Insurance 29
Blended instruments 31
Volatility issues 34
The results: the hours of terror, weeks of boredom 36
The gas crack 37
The markets for capacity and ancillary services 38
Arbitrage 38
Conclusion 38

Market Analysis 41
Inputs to electricity price analysis 41
Demand for electricity 41
Weather forecasting 44
Capacity analysis: outages, additions and constraints ongeneration and transmission 45
Input fuels 48
Oil 49
Natural gas 60
Integrating the inputs: the dispatch process 68
Electricity market depth, liquidity, herding behaviour and pricevolatility 71
The heat event of June 7-8, 1999 71
Herding behaviour 72
Are margins mean-reverting? 73

Hedging and Trading in Electricity Markets 75
Hedging instruments 75
Purposes of hedging electricity 77
Volatility reduction 78
Hedge gain maximisation and other extensions of risk management79
Hedgemasters and portfolios 80
Types of hedging and trading programmes 84
Trading examples 85
Forward market strategies 87
Pure options strategies 90
Selling options 91
Options combinations 92
Hedging by condition: backwardised and contango markets 97
Self-insurance with finite risk instruments 100
Weather derivatives 101
Conclusions 102
Winners and losers 103
Energy consumers 104

Conclusions: Transition, Adaptation, Concentration 107
First conclusion: second decision must be better than the first108
Second conclusion: cannot avoid power trading 110
Third conclusion: develop new energy products 113
And in the end 114

Notes 115
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