Electricity Market, Energy Economics and Strategic Planning

Introduction

In economic terms, Electricity (both Power and Energy) is a commodity capable of being bought, sold, and traded. An Electricity Market is a system for effecting purchases, through bids to buy; sales, through offers to sell; and short-term trades, generally in the form of financial or obligation swaps. Bids and offers use supply and demand principles to set the price. Long-term trades are contracts similar to power purchase agreements and generally considered private bi-lateral transactions between counterparties.

Wholesale transactions (bids and offers) in Electricity are typically cleared and settled by the market operator or a special-purpose independent entity charged exclusively with that function. Market operators do not clear trades but often require knowledge of the trade in order to maintain generation and load balance. The commodities within an electric market generally consist of two types: power and energy.

Power is the metered net electrical transfer rate at any given moment and is measured in megawatts (MW).

Energy is electricity that flows through a metered point for a given period and is measured in megawatt-hours (MWH).

The market mechanisms introduced a new discipline to be used by power systems professionals. This course explores the market economics and the associated exposure that can be mitigated with financial instruments. The course provides a good understanding of the market structures, the power and energy exchanges, and the hedging instruments that become part of the engineering toolbox. Special attention is given to the identification of Risk Exposure and Mitigation of Risk.

Objectives

This program is intended to immerse the participants in learning about Electricity Power Markets: How they can be developed, planned, and implemented. By the end of the training, participants will be able to:

• Understanding the Planning and Operating Process
• Understanding the Financial and Economic issues
• Ability to deal with the risks associated with Market Uncertainties.

Training Methodology

This is an interactive course. There will be open question and answer sessions, regular group exercises and activities, videos, case studies, and presentations on best practice. Participants will have the opportunity to share with the facilitator and other participants on what works well and not so well for them, as well as work on issues from their own organizations. The online course is conducted online using MS-Teams/ClickMeeting.

Who Should Attend?

This course is intended for Practitioners Trading Power, Power System Engineers, Managers, Engineers, and Planners related to Energy and Power Market.

Course Outline

Day 1: Module (01) Risk Management

• Sustainability; the capacity for continuity into the long term future

• Risk Framework/Metrics

• Examples of Regulatory Risks

• Types of Instruments

• Futures (NYMEX, Amsterdam Exchange)

• Strategies: Vanilla and Exotic Options

• Design of Contracts (ISDA, EEI, OTC, NYMEX)

• Typical Trades - Futures, SWAPS, OPTIONS

  • Choice of Hedges

  • Real-life Examples

  • Types of Trades - Useful to the Producer

  • Types of Trades - Useful to the Load

• Advantage/Disadvantage of different Tools

Module (02): Lessons Learned from other Jurisdictions

• North America Market (FERC)

• FERC white paper on Transmission Policy

• Challenges of Scale, Scope, and Timing

Day 2: Module (03): Elements of Risks (Strategic Issues)

• Basel Committee for Banking Supervision

• Market Locational Risk

• Operational Risk

• Credit Risk/ Liquidity Risk

• Physical Risk of Generating Assets

• Legal and Regulatory Risks

• Trading Controls and Best Practices

• Independent Risk Management

• Front to Back Office Case Studies:

• Enron’s Price Maximization

• Quantitative / Qualitative Risks

Module (04): Concepts of Derivatives Part I

• Forward Contracts: Contango, Backwardation

• Futures Contracts

• Contract Standardization

• Energy Futures contracts

• Arbitrage Pricing Theory

• Convenience Yield

• Swaps

Day 3: Module (05): Concepts of Derivatives Part II

• Option Contracts

• Strategies Involving Options

• Basic Options Strategies

• Call-Put Parity

• Daily Options, Monthly, Spreads

• Spark Options on 2 Commodities

• Spark Options on 3 Commodities

• Volumetric or Swing Options

• Real Options: Power and Physical Constraints

Module (06): Option Valuation

• Valuation of Option Strategies

• Closed-Form Solutions (Black Scholes)

• The Binomial Tree Approach

• Monte Carlo Valuation of Options

• Examples of Hedging

Day 4: Module (07): Quantitative Financial Models

• Quantitative Financial Models

• Stochastic Factors: Production and Demand

• Mean Reversion Model, Jumps

Module (08): Market Economics

• Day-Ahead Market

• Unconstrained Price

• Constrained Price

• Bidding Strategy

• Locational Marginal Price

• Energy Price Cap

Day 5: Module (09): Portfolio Analysis

• Demand & Supply

• Demand & Supply Equilibrium Price

• Value AT Risk

• Strategic Planning

  • Multiyear Plan

  • Multi-Area Forecasting

  • Budget

  • Forward Prices

Module (10): Financial Transmission Rights

• Transmission Pricing

• Congestion Management

• Auction

CASE STUDY: Weather Derivatives

• Weather Risk

• Description of Weather Contracts

• Weather Risk Management Instruments

Market Economics (Best Practices)