Risk Management in Power Markets

A highly practical approach to identifying and managing risk exposure in liberalising electricity markets

Course Highlights

During two intensive days you will:

Use topical situations to illustrate the theories of risk management in power trading - a highly practical approach
Learn from an international power expert who can translate jargon into clear and relevant information
Learn how to identify risks and gain a practical approach to mitigating them using current real-life examples
Get to grips with a number of pricing and risk modelling techniques which will prove invaluable to you in the future

For details of the course trainer, please download the course brochure

Booking Information

Dates	Prices	Book This Course	Discount
04 - 05 Oct 2010	£ 1899		-
11 - 12 Apr 2011	£ 1899		-

Course Programme

DAY ONE

Introduction

Risk management in the power industry
Lessons from the credit crisis in 2008
10 golden rules for an effective risk management framework

Risks in the Power Business

The electricity value chain
- Fuels, generation, transmission & distribution, wholesale, carbon and retail
Portfolio of contracts:
- Forward sales
– Retail supply
– Fuel
– CO2
– Freight
– Hedges etc.
Sources of risk:
– Market
– Credit
– Operational
– Legal and regulatory
– Business
– Strategic
– Reputation risk
The power plant as a spread option

Scope of Framework

Risk appetite and tolerance
Corporate governance
Risk metrics
Risk policies
Measurement and reporting

Putting Risk Management into Practice

Determining the objective
Mapping the risks
Risk management instruments
Constructing and implementing a practical strategy:
– Static vs. dynamic strategy
Performance evaluation

Governance and Risk Management

Principles of good governance
Roles and responsibilities in practice
Risk limits and standard policies
– Market risk and credit risk limits
Standards for monitoring risks

Measurement Approaches

Notional amount approach
Price sensitivity measures derivatives
What is Value at Risk (VaR)
How to use VaR to limit risk in practice
Need for stress testing and scenario analysis

Risk Capital and Risk-Adjusted Performance Measurement

The need for risk capital
RAROC (Risk Adjusted Return on Capital)
Risk capital allocation
Market, credit and operational
Capital allocation:
– Current trends in capital allocation in the energy industry
- The capital allocation process

DAY TWO

Introduction to Derivatives

What are derivatives and who are using them?
The different instruments:
– Forwards
– Swaps
– Spark spreads
– Futures and options
The forward curve
Pay-off structures of different instruments

Forwards, Futures and Swaps

Main characteristics of forwards, futures and swaps
Convergence of forward prices to spot prices
Clearing and margins: how does it work
Forward spreads (time, commodity): calendar spreads, spark spreads, crack spreads
How to use forward curve dynamics: contagion and backwardation

Getting to Grips with Options

Option value drivers:
– Underlying
– Strike
– Volatility
– Interest rate
European, American, Asian style options
Put-call parity
Implied volatility

Market Risk Management

What are the key drivers on price?
How does price risk arise?
What causes price volatility?
How does market structure impact on price?
Limits to volatility

Market Risk Hedging Strategies

Hedging against spot price risk
Hedging and liquidity risk
The optimal hedge ratio
Roll-over hedge
Option Greeks analysis
Delta hedging
Hedging volatility

Credit Risk Management

Components credit risk
Credit risk management in the energy industry
Credit risk measurement building blocks
Credit risk mitigation
Credit risk in trading books:
– Credit charging

Operational Risk Management

What are the operational risks:
– People, process, systems and technology risk
Measurement approaches
8 steps for operational risk management
Mitigating operational risk:
– Insurance against operational risk
Monitoring and controlling

The course is highly practical and will make extensive use of market-focused case studies throughout the programme. The intention will be to highlight real-world issues when dealing with risk in the power industry and will reinforce the content covered throughout the course. Cases will include specific analysis of:

■ Metallgesellschaft Refining & Marketing (MGRM)
■ Barings
■ VaR
■ Spark Spreads
■ Enron