Generation Risk Mgt and Assets as Options

Generation Risk Mgt and Assets as Options - FINC 782 Energy...

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1 Generation Risk Management and Assets as Options FINC 782: Energy Markets Portfolio Analysis AB Freeman School of Business, Tulane University, New Orleans, Fall 2007 Leslie McNew Email at [email protected] 865-5036
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2 Objectives of Risk Management 4 Primary Objectives: Comply with regulators Obtain a good rating, at product and/or firmwide level Protect the business against unfavorable events Optimize the risk-return trade-off
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3 Objectives of Risk Management Risk Management is first and foremost a Control and Optimization Function Control: implies a quantitative evaluation of risk-quantify the risk of the ‘system’ ensures that over a given period risk remains within determined levels
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4 SCIENCE Quantitative Models/Forecasting Stress Testing Simulation ART Human Intellect: Common Sense Intuition/Interpretation Availability of Fresh Data Reality Check on Model Communication Objectives of Risk Management
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5 Quantitative Evaluation of Generation Risk Risk Management Hedge Excess Economic Generation Objective hedge the system risk Protect the Corporation against uncertainties in the market by stabilizing the forward cash-flow Risk Management Quantitative Evaluation of Risk Practical Application of ESOQ/EPOQ Generation Model: hedging excess generation ESOQ economic sales opportunity quantity EPOQ economic purchase opportunity quantity
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6 Quantitative Evaluation of Generation Risk General Overview of ESOQ / EPOQ Model: 1. True daily generation capacity = generation capacity - forced/planned outages Create a possible distribution of daily forced outage rates per unit, based on historical data: use distribution to project into future Planned outages from the maintenance schedule: planned outages take down the unit for the period
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7 ESOQ / EPOQ Model 2. Filter true generation against the forward price curve and compare outcome against the marginal cost of generation per each unit EAG = Economically Available Generation Marginal Cost of Generation 0 5,000 10,000 15,000 20,000 25,000 30,000 $7.50 $17.50 $27.50 $37.50 $47.50 $57.50 $67.50 $77.50 Power Forward Price Curve $0 $20 $40 $60 $80 $100 $120 $140 $160 Feb-99 Mar-99 Apr-99 May-99 Jun-99 Jul-99 Aug-99 Sep-99 Oct-99 Nov-99 Dec-99 Jan-00 Feb-00
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8 ESOQ / EPOQ Model 3. Adjust EAG for expected native load EAG - Expected Native Load = ESOQ / EPOQ
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9 ESOQ / EPOQ Model EAG > Expected Load = ESOQ EAG < Expected Load = EPOQ The ability to hedge generation risk by selling off excess power The ability to hedge excess generation risk by buying power to insure native load
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10 ESOQ / EPOQ Model Sample Outputs ON-PEAK FORWARDS Book Economic Hedge Adj Position Forward Undiversified T MM/YY WD Generation MW MW Current Stressed Price Value-at-Risk ST CuW 1/00 1 1,046 L 7,591 523 7,591 58.5% 18.13 $ 383,857 $ WK1 2/00 4 1,046 L 7,928 523 7,928 28.8% 22.60 $ 1,032,369 $ WK2 5 978 L 7,928 489 7,928 28.8% 22.60 $ 1,290,462 $ WK3 5 1,057 L 7,928 529 7,928 28.8% 22.60 $ 1,290,462 $ WK4 4 847 L 7,928 424 7,928 28.8% 22.60 $ 1,032,369 $ WK5 4 838 L 7,928 419 7,928 28.8% 22.60 $ 1,032,369 $ LT M02 3/00 20 1,288 L 8,479 644 8,479 30.2% 27.00 $ 6,906,146 $ M03 4/00 20 1,472 L 8,134 442 8,134 28.5% 25.75 $ 5,966,863 $ M04 5/00 23 1,009 L 7,049 303 7,049 27.1% 23.35 $ 5,140,334 $ M05 6/00 22 1,483 L 7,079 445 7,079 31.5% 23.50 $ 5,736,543 $ M06 7/00 20 2,693 L 8,248 8,248 37.6% 31.00 $ 9,485,605 $ M07 8/00 22 2,960 L 10,264 10,264 83.7% 71.50 $ 61,969,577 $ M08 9/00 21 2,412 L 10,863 724 10,863 60.5% 132.00 $ 86,602,452 $ M09 10/00 22 3,161 L 10,863 948 10,863 56.1% 125.00 $ 80,291,550 $ M10 11/00 21 1,785 L 8,925 536 8,925 48.1% 38.25 $ 16,734,262 $ M11 12/00 21 336 L 6,416 101 6,416 34.3% 24.50 $ 5,611,794 $ M12 1/01 21
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