Quantifying Risk in the Electricity Business: A RAROC-based Approach
Posted: 24 Oct 2007
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
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