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Alfred HoffmannBewag AG, Berlin23th January 2003, St. Veit, Austria
Alfred HoffmannBewag AG, Berlin23th January 2003, St. Veit, Austria
Long-Term Trading StrategiesLong-Term Trading Strategies
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Structure
Definition of the strategy
Implementation of the strategy
Case Study
Conclusions
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Value chains in the power industry
Gas Value ChainGas Value Chain
Power and Heat Value ChainPower and Heat Value Chain
Dis-tribution
RetailSalesHeat Extraction
Dis-tribution
RetailSales
FuelPreparation Generation
Transmis-sion and SystemService
GasOilNuclearCoal
Dis-tribution
RetailSales
Transportation and StorageExploitation Processing
Heat Extraction
FuelPreparation Generation
GasOilNuclearCoal
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Planning-periods and their aims
Time-horizon
Long-Term Mid-Term Short-Term Online
10 days - n years 2-10 days 1 day Online
Model
Model-definition usually more complex with shorter time-horizons
Reasons for the fragmantation of time-horizonUncertainty of parameters higher then model-accuracyTime-performance higher then useful
Aims
planning of maintenance short-term-maintenance unit-dispatching reaction on outagesplanning of fuel-amounts unit-commitment dispatch of ancillaray servicesEvaluation of technical dispatch of fuel control of productionand economical scenarios
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Milestones of Long-Term-Trading-Strategies
Define the objective of the generation business-unit (BU)
Identify the risks of the BU
Define responsibilities
Search for / develop suitable hedge-products
Establish portfoliomanagement
Establish continuous risk-measurement and -reporting
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Define the objective
Maximise the profits!
How much risk are you willing to take?
How much risk are your shareholders willing to take?
Define the benchmarkEBITAROCE
...
Take a look at your portfolio!
Maximise the volume and minimise the specific costs?
!!!! !!
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Risks (I): Investment Risk
Mostly not focused during the implementation of portfolio-management, because investments are already taken
Possibility to avoid stranded investments through
Legal acts (KWKMG, EEG, Lex-Veag)
Long-term-sales-contracts and –fuel-contracts
Or define it as general business-risk
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Risks (II): Operational Risk
Technical RiskOutage of technical equipment, fire etc. -> mainly hedged by producer guaranties and insurancesWaste of revenues is often unconsidered!
Human ResourcesRecruitment of adequate staff is key-task of the management and HR-department
Model RiskExamination and verification of your risk-models have to be established
Organisational RiskEnsure the process-chain (responsibility, time-schedules, effectiveness)
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Risks (III/1): Market Risk
PricePrices are volatile and influence the production-portfolio in a significant way
LiquidityVolumes may influence the prices on the wholesale market.
An OTC-Term-Volume of approx. 1500 TWh (300%) and day-ahead-volume of 50 TWh (10%)
do not affect small producers.
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Risks (III/2): Market Risk
VolumeEspecially coal (oil) comprises volume-risk, caused by the transport-specialities like availability of the transport-system (boat and river), capacity of the storage and the fuel-characteristics which at best influences the generation-process and at worst makes it impossible (gross calorific value, ash, sulphur)
CurrencyCurrency-Risk of Europe-wide electricity-sales do not exist (transborder-capacity-risk is more evident)
Fuels, with the exception of lignite, comprise currency-risk
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Risks (IV): Counterpart Risk
Credit-RiskSuppose that close-out-netting is possible the counterpart-credit-exposure should be limited to an amount of 2-3 months
Position-Recovery-RiskNo matter if you have sold or bought electricity to/from the concerned counterpart - you have to recover your position which could provoke losses, because the market had moved.(generators generally buy energy too to manage their portfolio)
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Forward-Prices
2 2 ,2 5 €
2 2 ,4 5 €
2 2 ,6 5 €
2 2 ,8 5 €
2 3 ,0 5 €
2 3 ,2 5 €
2 3 ,4 5 €
2 3 ,6 5 €
2 3 ,8 5 €
2 4 ,0 5 €
2 4 ,2 5 €
2 4 ,4 5 €
2 4 ,6 5 €
2 4 ,8 5 €
2 5 ,0 5 €
2 5 ,2 5 €
2 5 ,4 5 €
De z 0 1 Ja n 02 Fe b Mrz A p r Mai Ju n Ju l A u g Se p Okt No v D
V e rg le ic h : [A V G - Ja h r B as e - De uts c h la n d] (b la u ) u n d [A V G - Ja h r B as e - De uts c h la n d] ( ro t)
31 ,00 €
32 ,00 €
33 ,00 €
34 ,00 €
35 ,00 €
36 ,00 €
37 ,00 €
38 ,00 €
39 ,00 €
Dez 01 Jan 02 Feb Mrz A pr Ma i Jun Ju l A ug S ep Okt Nov D
V erg le ic h : [A V G - Jah r Peak - Deu ts c hland ] ( b lau) und [A V G - Jah r Peak - Deu ts c h land ] ( ro t)
Base-Prices of 2003 and 2004
Peak-Prices of 2003 and 2004
Best-Trading-Situations
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How to realise this trades
In general it is nearly impossible to sell the energy at the highest price
The only thing which is possibleIf the CHP-Operator is willing to take risk this might be useful if forward-price-volatility is highCheck the effects of volatility on the portfolio (e.g. by stochastic programming)
Realise trades when prices seem to be high compared to your long-term-expectations and volatilities Never stay outside your limits as prices may fall (unexpectedly)
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Exchange-Spot-Prices
LPX Phelix base
0
5
10
15
20
25
30
35
40
45
50
Jan02
Feb02
Mrz02
A pr02
Mai02
Jun02
Jul02
A ug02
Sep02
Okt02
Nov02
Dez02
€/M Wh
0
50
10 0
150
2 0 0
2 50
3 0 0
3 50
4 0 0
4 50
50 0
GWh
V olume Price
Beware of chances and risks of short-term-price-movements !
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Case-Study: Coal fired condensing-extraction-turbine
G
P [MW]
dQ/dtfuel [MW] dQ/dtheat [MW]
boiler
turbine
condenser
generator
heat-customer
wholesale-electricity wholesale-ancillary-services
transformer
fuel
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Characteristics: Market environment, contracts
Electricity-wholesale-pricesgiven by the forward curve and an hourly volatility
Secondary-reserve-pricesgiven e.g. by RWE-history and an hourly volatility
Fuel pricesgiven by a long-term „Take or Pay“-Contract
additional volumes are to be bought at the spot-market
Heat-demandHeat-demand varies depending on the temperature
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Expectation of EBITA
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9
423
37
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Cas
h-fl o
w [M
io. €
]
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CH
P-El
ectri
city
CH
P-KW
KMG
Con
dens
ing-
Elec
trici
tyPe
riphe
ral
Prod
uctio
n
Hea
t
Anci
llary
-Se
rvic
es
Fuel
Staf
f
Mai
nten
ance
,In
sura
nces
,...
Dep
reci
atio
n
8
-1
3
2
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Define your book-structure
HeatPossible Limits: EBITA (PaR), VaR, ROCE, ...
ElectricityPossible Limits: EBITA, Net-Position-Energy, Net-Position-Power, VaR, ROCE, ...
CoalPossible Limits: EBITA, Net-Position-Energy, VaR, Storage, ROCE, ...
Whole portfolioEBITA, VaR, ROCE, ...
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Take a look at your books
Calculated viaStress testing,
Monte Carlo Simulation,
Analytic approach (difficult, because of the non-linearity's)
HeatElectricity
Portfolio
012
- 1- 2
Mio. €
Jan. Jul. Dez.
100
200
0
0
2
- 2
- 4
Mio. €GWh
Jan. Jul. Dez.
02
- 2- 4- 6- 8
- 10
200
300
100
0
4Mio. €GWh
Jan. Jul. Dez.
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Books after first hedge
PortfolioHedging-Transactions:Electricity-Forward-ShortCoal-Forward-LongTemperature-Hedge(March, April, October, November)
100
200
0Jan. Jul. Dez.
02
- 2- 4- 6- 8
- 10
200
300
100
0
4
Jan. Jul. Dez.
012
- 1- 2
Mio. €
Jan. Jul. Dez.
HeatElectricityMio. €GWh Mio. €GWh
Caused by volume-sensitivity based on thesmall spread between coal and electricity!
0
2
- 2
- 4
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21 * Evaluation against the market
-1.000
0
1.000
2.000
3.000
4.000
5.000
6.000
7.000
8.000
-1 -0,5 0 0,5 1 1,5 2
Profit of portfolioDerivative ProductOver all ProfitPr
ofit
T€
Ave
rage
Yea
r
Temperature-Differance in K compaired to Long-Term-Average
*
Weather-Hedge
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Portfolio after second hedge
Summer-volatility could be hedged by „Coal-Spark-Spread“ or by „Electricity-Put“ and „Coal-Call“ both linked with paymentsPut/Call realised and EBITA-Range between 2,9-x,x Mio. €
Additional small transactions necessary
Jan. Jul. Dez.Feb. Mrz. Apr. Mai. Jun. Aug. Sep. Okt. Nov.
0
1
2
- 1
- 2
Mio. €
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Conclusions
Generation-portfolio is the most complex (non-linear interconnected with every energy-based-wholesale-market)
Product-variety is great and increases continuously, but liquidity is still boundedHedging should be realised near to the front desk of Trading
Risk should be reported every dayPortfolio-aggregation is favourable as risk „is“ smaller and limits are always short (enterprise-wide-risk-management!) „Step by step“-hedging is supported by trading-software but best-hedge-optimisation might be more interesting, even if to date the idea is unable to be carried out due to IT performance constraints.OSCOGEN-Project !
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Thank you for your interest.Thank you for your interest.
CHP - Mitte in Berlin