Handbook of Risk Management in Energy Production and Trading

Electricity production, delivery and trading developed from simple supply chains with one producer with one delivery network to several customers in the beginning of the 20th century to a very complex system of interconnected producers, huge transportation networks managed by independent system operators and exchange markets on which spot products as well as futures are traded. By complexity, such modern systems are subject to many different risks, such as technical risk in production, transportation and delivery, operational risk for the system operators as well as markets risks for traders and political and other long term risks in strategical management. §This book attempts to give an overview over these types of risk and many of its chapters describe how modern risk management methods may be applied. All management decision have to be made in situations, where not all relevant data are precisely known. Therefore decision making under uncertainty is the methodological background and many papers of this book use multistage stochastic optimization as a basic tool for analysis.§The book is divided into four parts. Part I is devoted to energy markets. in particular electricity markets. In energy risk management it is important to keep in mind the whole production, storing and distribution process with all related economic and physical, restrictions. This makes a big different to purely financial markets. Part II therefore deals with optimal decisions in managing energy systems. Because the resulting optimization problems are typically difficult to deal with, algorithms are an important issue. Part III is devoted to pricing, covering several pricing principles and especially the pricing of electricity swing options in a unified framework, as well as the pricing of derivatives with volume control, treated in a classical financial setup. Finally Part IV widens the scope of risks to long term and political risks.