Quantifying risk in the electricity business: A RAROC-based approach

Marcel Prokopczuk, Svetlozar T. Rachev, Gero Schindlmayr, Stefan Trück

Research output: Contribution to journalArticlepeer-review

14 Scopus citations

Abstract

The liberalization of electricity markets has forced energy producing companies and traders to calculate costs closer to the profit frontier. Thus, an efficient risk management and risk controlling are needed to ensure the financial survival even during bad times. Using the RAROC methodology we provide a new framework to quantify risks related to wholesale electricity contracts, also called full load contracts. We do not only consider risk of market price fluctuations but also correlation effects between the spot market price and the load curve of a customer. We further conduct an empirical study on whole sale contracts for industry customers and public utility companies of a German energy provider. Our findings support the adequateness of the approach and point out the importance of considering also price-volume correlation effects for electricity whole sale contracts.

Original languageEnglish
Pages (from-to)1033-1049
Number of pages17
JournalEnergy Economics
Volume29
Issue number5
DOIs
StatePublished - Sep 2007

Keywords

  • Load contracts
  • Power markets
  • RAROC
  • Risk management
  • Spot market prices

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