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Quantifying risk in the electricity business: A RAROC-based approach

Prokopczuk, Marcel, Rachev, Svetlozar , Schindlmayr, Gero, & Trueck, Stefan (2007) Quantifying risk in the electricity business: A RAROC-based approach. Energy Economics, 29(5), pp. 1033-1049.

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Abstract

The liberalization of electricity markets has forced energy producing companies and traders to calculate costs closer to the profit frontier. Thus, an efficient risk management and risk controlling are needed to ensure the financial survival even during bad times. Using the RAROC methodology we provide a new framework to quantify risks related to wholesale electricity contracts, also called full load contracts.We do not only consider risk of market price fluctuations but also correlation effects between the spot market price and the load curve of a customer. We further conduct an empirical study on whole sale contracts for industry customers and public utility companies of aGerman energy provider. Our findings support the adequateness of the approach and point out the importance of considering also price–volume correlation effects for electricity whole sale contracts.

Impact and interest:

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ID Code: 8117
Item Type: Journal Article
Additional Information: For more information, please refer to the journal's website (see hypertext link) or contact the author. Author contact details: rachev@pstat.ucsb.edu
Keywords: Power markets, Spot market prices, Load contracts, Risk management, RAROC
DOI: 10.1016/j.eneco.2006.08.006
ISSN: 0140-9883
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > APPLIED ECONOMICS (140200) > Applied Economics not elsewhere classified (140299)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Copyright Owner: Copyright 2007 Elsevier
Deposited On: 20 Jun 2007
Last Modified: 11 Aug 2011 02:58

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