Quantifying Risk in the Electricity Business: A RAROC-based Approach

Posted: 24 Oct 2007

See all articles by Svetlozar Rachev

Svetlozar Rachev

Texas Tech University

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Gero Schindlmayr

affiliation not provided to SSRN

Stefan Trück

Macquarie University Sydney - Department of Applied Finance and Actuarial Studies; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR); Macquarie University, Macquarie Business School

Abstract

The liberalization of electricity markets has forced the energy producing companies to react to the new situation. The abolishment of monopolies and the launch of open markets have increased the need of calculating costs closer to the profit frontier to be still competitive, not only against the other German but also against foreign suppliers. Thus, an efficient risk management and risk controlling are needed to ensure the financial survival of the company even during bad times. In this work we use the RAROC methodology to develop a Monte Carlo Simulation based model to quantify risks related to wholesale electricity contracts, also called full load contracts. We do not only consider risk due to market price fluctuations but also due to correlation effects between the spot market price and the load curve of a single customer.

Keywords: Power Markets, Spot Market Prices, Load Contracts, Risk Management, RAROC

JEL Classification: Q40, G13

Suggested Citation

Rachev, Svetlozar and Prokopczuk, Marcel and Schindlmayr, Gero and Trueck, Stefan, Quantifying Risk in the Electricity Business: A RAROC-based Approach. Energy Economics, Vol. 29, No. 5, 2007, Available at SSRN: https://ssrn.com/abstract=1024082

Svetlozar Rachev

Texas Tech University ( email )

Dept of Mathematics and Statistics
Lubbock, TX 79409
United States
631-662-6516 (Phone)

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Gero Schindlmayr

affiliation not provided to SSRN ( email )

No Address Available

Stefan Trueck (Contact Author)

Macquarie University Sydney - Department of Applied Finance and Actuarial Studies ( email )

North Ryde
Sydney, New South Wales 2109
Australia
61298508483 (Phone)
61298508483 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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