Generation Risk Mgt and Assets as Options

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

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
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 Lmcnew@tulane.edu 865-5036
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 2
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
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 4
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
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 6
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
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
8 ESOQ / EPOQ Model 3. Adjust EAG for expected native load EAG - Expected Native Load = ESOQ / EPOQ
Background image of page 8
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
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 45

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

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online