Price Risk Management in the Energy Industry: The Value at Risk Approach

Abstract:     
In this paper we show how Value-at-Risk (VaR) can be used to measure price risk exposure in the energy sector. We start by introducing some principal theoretical facts about VaR, utilising it to calculate risk exposure in the refining industry. We then investigate the conditions that imply price risk arising in the energy sector. That enables us to understand where, in the near future, actors will need price risk management using VaR. A further analysis of the gas sector demonstrates that also in a bundled supply chain there is already a certain amount of price risk, due to the formula prices used. Liberalisation could introduce different scenarios regarding the amount of volatility in prices, and this point is analysed for power generation, where interfuel competition will be crucial. Finally we extend the VaR concept to old and new supply of energy sources; producers, following either a passive or an active supply strategy, will soon need risk measurement tools.

La versione italiana di questo paper si trova in http://ssrn.com/abstract=1992427

Number of Pages in PDF File: 10

Keywords: Value at Risk, VaR, risk management, risk measurement, energy industry, oil industry , refining industry, power generation, unbundling, commoditization, Liberalisation, interfuel competition

JEL Classification: G10

Accepted Paper Series