Optimization of Risk Management Problems in Generation and Trading Planning

Summary

Due to increased cost pressure on power generation and trading companies, caused by operation under market conditions, a cost efficient management of the risks becomes more important. As a result of the liberalization of the markets for electrical energy companies are exposed to higher uncertainties in power generation and trading planning, e.g., the volatility of the prices for electrical energy and for primary energies, especially natural gas. Additionally, bankruptcies of companies in the energy sector, e.g., ENRON or TXU Europe, have demonstrated that the loss of trading partners may cause a major disprofit, if not hedged appropriately. Together with risk management regulations, the need for risk management in generation and trading planning is increasing.

The objective of this work is the development of adequate methods for generation and trading planning, i.e., maximization of the contribution margin, taking the risks into account. The risk management process comprises identification and analysis of both risks and their impacts as well as the control of the occurring risks.

In this work two approaches, a separate expost and an integrated risk management method, have been developed using appropriate algorithms [2]. The expost approach uses the schedule of the power plants from the generation planning as given input data and optimizes the trading decisions by means of risk management concepts. The integrated approach yields the optimal generation and trading decision in terms of maximal contribution margin as well as minimal risk in one step.

The multicriterial optimization of the maximal contribution margin as well as the minimal risk is implemented either by risk constraints which limit the risk to a maximum or by utility functions which map the combination of contribution margin and risk to a single criterion.

The investigations of different systems demonstrate the results of the different risk management methods, whereas in this paper the results of a thermal dominated typical German generation and trading company are discussed.

Investigation of the effectiveness of the risk management methods using different power markets show improvement of the risk control participating in these markets compared to the negligence of these opportunities. Entering markets for weather and primary energy derivatives can reduce the risk of the portfolio.

The investigations show the tradeoff between contribution margin and risk. Depending on the risk aversion of the company the risk can be reduced for the tradeoff of a lower contribution margin. Comparing the results of the expost and the integrated risk management, it can be summarized that the integrated approach is more effective. This is due to the advantage of the integrated risk management method using both redispatch of the power plants for risk management purposes and even more important for adaptation to changed trading decisions.