An Introduction to Risk Management in the Electricity Market

Code: ELRisk

Objective: To provide a practical introduction to the hedge market, and to techniques and methods for hedging price risk in electricity markets, with an emphasis on developing skills in working with and applying common forms of hedge contract.

Prerequisites: EL0, with ELNP1 also being useful background.  Alternatively, familiarity with key elements of the electricity supply system including the Grid, metering and various types of generation.  Some familiarity with the behaviour of prices from the spot market is also useful.

The course includes a number of rounds of our hedging simulation which simulates the process by which hedging decisions are made.

Introduction

What is a hedge?

Common supply arrangements – ‘contracts for differences’, ‘fixed price variable volume’

Volatility in the electricity spot market

Attitudes to risk, risk premiums

Hedging Electricity

Securities Markets Act

Contracts for differences

Swaps and options

Futures and swaptions

Financial transmission rights (FTRs)

The spot market’s ‘losses and constraints surplus’

Hedging Strategy

Location factor adjustments

Optimum generation with hedges in place

Using FTRs

Timing of hedge transactions

Building a “hedge book”

The forward curve

The role of forecasts

Pricing and valuing futures, swaps and options

Modelling hedge strategies

Stress testing

The Hedge Market

The hedge market in New Zealand

Hedge market liquidity

Miscellaneous

The ISDA agreement

Front, middle and back offices

Fair value and hedge accounting

NB:       Course material may vary from the above on the day.