January 23, 2004 Electricity risk management. Isolated markets Long term auctions Bilateral...
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January 23, 2004 Electricity risk management
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Transcript of January 23, 2004 Electricity risk management. Isolated markets Long term auctions Bilateral...
January 23, 2004
Electricity risk management
Isolated markets Isolated markets
Long term auctions
Bilateral arrangements
Bilateral arrangements
Daily auction
s
Paper
Development of electricity markets
Exchange Traded Instruments
Standardised Contracts Physical Delivery / Cash Settled Margin Requirements Basis Risk (Product, Location, Time) Regulated Markets No Counter-party Risk Liquidity ( NYMEX ClearPort®)
Over-The-Counter
Principal-to-principal contracts Cash-settled Customised Contracts Credit & Counterparty Risk Greater flexibility (Product, Location, Time) Liquidity Issues
Global electricity exchanges NYMEX Nordic Power Exchange Australian Stock Exchange (ASX) Energy Exchange Austria (EXAA) European Energy Exchange (EEX) Watt Exchange Amsterdam Power Exchange (APX)
Futures Futures contracts are firm commitments to
make or accept delivery of a specified quantity and quality of a commodity during a specific month in future at a price agreed Most liquid market Governed and insured market Participation in market gains and losses Basis risk Margin Calls Relatively low transaction costs
Hedging through futures
XYZ Steel Limited
Power Consumption : 30
million
units a month
Currently procuring power
from a
Discom ABC at average price
of
“UI” in Western region
Cost of electricity unknown
for
next month
XYZ Steel Limited
Power Consumption : 30
million
units a month
Currently procuring power
from a
Discom ABC at average price
of
“UI” in Western region
Cost of electricity unknown
for
next month Futures quoting at Rs. 3.50
per unit
Contract size : 1 million units
Purchases 30 electricity
futures
Futures quoting at Rs. 3.50
per unit
Contract size : 1 million units
Purchases 30 electricity
futures
Particulars Rupees Payment to ABC Limited Rs. 3.90 * 30 mio units 117,000,000
Gain from futures contract(3.90 - 3.50) * 30 mio units (12,000,000)
Net electricity cost 105,000,000
Particulars Rupees Payment to ABC Limited Rs. 2.70 * 30 mio units 81,000,000
Loss from futures contract(3.50 - 2.70) * 30 mio units 24,000,000
Net electricity cost 105,000,000
Price moves up
Price moves down
OptionsThe buyer of an option has the right, but not theobligation to buy or sell an agreed amount of a commodity at an agreed price
call option gives the buyer right to buy the underlying commodity at the strike price
put option gives the buyer right to sell the underlying commodity at the strike price
American/ European/Asian
Hedging through options
XYZ Steel Limited
Power Consumption : 30
million
units a month
Currently procuring power
from a
Discom ABC at average price
of
“UI” in Western region
Cost of electricity unknown
for
the next month
XYZ Steel Limited
Power Consumption : 30
million
units a month
Currently procuring power
from a
Discom ABC at average price
of
“UI” in Western region
Cost of electricity unknown
for
the next month Call options
Strike 3.50 unit
Premium 20 paise per unit
Contract size : 1 million units
Purchases 30 call electricity
options
Call options
Strike 3.50 unit
Premium 20 paise per unit
Contract size : 1 million units
Purchases 30 call electricity
options
Particulars Rupees Payment to ABC Limited
Rs. 2.70 * 30 mio units 81,000,000
Options Premium
20 paise * 30 mio units 6,000,000
Profit/ Loss from option -
Net electricity cost 87,000,000
Particulars Rupees Payment to ABC Limited
Rs. 2.70 * 30 mio units 81,000,000
Options Premium
20 paise * 30 mio units 6,000,000
Profit/ Loss from option -
Net electricity cost 87,000,000
Particulars Rupees Payment to ABC Limited
Rs. 3.90 * 30 mio units 117,000,000
Options Premium
20 paise * 30 mio units 6,000,000
Profit on options contracts
(3.90-3.50) * 30 mio units (12,000,000)
Net electricity cost 111,000,000
`̀Particulars Rupees Payment to ABC Limited
Rs. 3.90 * 30 mio units 117,000,000
Options Premium
20 paise * 30 mio units 6,000,000
Profit on options contracts
(3.90-3.50) * 30 mio units (12,000,000)
Net electricity cost 111,000,000
Price moves up
Price moves down
Options
Know the limit on costs up front Relatively low transaction costs More like pure insurance Openly traded and visible market No subsequent cash outlays Governed and insured market
Spark Contracts Simultaneous purchase and sale of electricity
and natural gas futures contracts Margin hedging strategy S = {S power – (S gas * h / 1000)}
S = spark spread per MWh S power = price of power sold
S gas = price of gas purchased H = heat rate ( Btu/kWH)
Swaps Agreement between parties whereby a
specified floating price is exchanged for fixed price over a specified period of time OTC against Exchange Traded Cash-flow linked to floating rate benchmark
( Platts Assessment / Closing Future prices at NYMEX)
Average Price over a period of time With or without margin Flexiblity (Product, Location, Time)
Mechanics of electricity swap
Electricity Producer
Swap Counterparty
Electricity Consumer
Physical Electricity
Market
Sell Floating
Buy Floating
Floating Floating
FixedFixed
Selling Fixed Buying Fixed
Choice of trading instrument
Nature of underlying Upfront premium Margins Time horizon for hedging Transaction costs Unwinding of contract Accounting & taxation issues Risk management systems
Thank you
