Electricity prices in competitive markets are extremely volatile with salient features such as mean-reversion and jumps and spikes. Modeling electricity spot prices is essential for asset and project valuation as well as risk management. I introduce the mean-reversion feature into a classical variance gamma model to model the electricity price dynamics as a mean-reverting variance gamma (MRVG) process. Derivative pricing formulae are derived through transform analysis and model parameters are estimated by the generalized method of moments and the Markov Chain Monte Carlo method. A real option approach is proposed to value a tolling contract incorporating operational characteristics of the generation asset and contractual constraints. Two simulation-based methods are proposed to solve the valuation problem. The effects of different electricity price assumptions on the valuation of tolling contracts are examined. Based on the valuation model, I also propose a heuristic scheme for hedging tolling contracts and demonstrate the validity of the hedging scheme through numerical examples. Autoregressive Conditional Heteroscedasticity (ARCH) and Generalized ARCH (GARCH) models are widely used to model price volatility in financial markets. Considering a GARCH model with heavy-tailed innovations for electricity price, I characterize the limiting distribution of a Value-at-Risk (VaR) estimator of the conditional electricity price distribution, which corresponds to the extremal quantile of the conditional distribution of the GARCH price process. I propose two methods, the normal approximation method and the data tilting method, for constructing confidence intervals for the conditional VaR estimator and assess their accuracies by simulation studies. The proposed approach is applied to electricity spot price data taken from the Pennsylvania-New Jersey-Maryland market to obtain confidence intervals of the empirically estimated Value-at-Risk of electricity prices. Several directions that deserve further investigation are pointed out for future research.

Electricity markets are being deregulated or face new regulatory frameworks. In such changing markets, new pricing strategies will need to consider such factors as cost, value of service and pricing by objective. Pricing in Competitive Electricity Markets introduces a new family of pricing concepts, methodologies, models, tools and databases focused on market-based pricing. This book reviews important theoretical pricing issues as well as practical pricing applications for changing electricity markets.

The challenges currently facing particIpants m competitive electricity markets are unique and staggering: unprecedented price volatility, a crippling lack of historical market data on which to test new modeling approaches, and a continuously changing regulatory structure. Meeting these challenges will require the knowledge and experience of both the engineering and finance communities. Yet the two communities continue to largely ignore each other. The finance community believes that engineering models are too detailed and complex to be practically applicable in the fast changing market environment. Engineers counter that the finance models are merely statistical regressions, lacking the necessary structure to capture the true dynamic properties of complex power systems. While both views have merit, neither group has by themselves been able to produce effective tools for meeting industry challenges. The goal of this book is to convey the fundamental differences between electricity and other traded commodities, and the impact these differences have on valuation, hedging and operational decisions made by market participants. The optimization problems associated with these decisions are formulated in the context of the market realities of today's power industry, including a lack of liquidity on forward and options markets, limited availability of historical data, and constantly changing regulatory structures.

Electricity markets are structurally different to other commodities, and the real-time dynamic balancing of the electricity network involves many external factors. Because of this, it is not a simple matter to transfer conventional models of financial time series analysis to wholesale electricity prices. The rationale for this compilation of chapters from international authors is, therefore, to provide econometric analysis of wholesale power markets around the world, to give greater understanding of their particular characteristics, and to assess the applicability of various methods of price modelling. Researchers and professionals in this sector will find the book an invaluable guide to the most important state-of-the-art modelling techniques which are converging to define the special approaches necessary for unravelling and forecasting the behaviour of electricity prices. It is a high-quality synthesis of the work of financial engineering, industrial economics and power systems analysis, as they relate to the behaviour of competitive electricity markets.

Understand the electricity market, its policies and how they drive prices, emissions, and security, with this comprehensive cross-disciplinary book. Author Chris Harris includes technical and quantitative arguments so you can confidently construct pricing models based on the various fluctuations that occur. Whether you?re a trader or an analyst, this book will enable you to make informed decisions about this volatile industry.

An essential overview of post-deregulation market operations inelectrical power systems Until recently the U.S. electricity industry was dominated byvertically integrated utilities. It is now evolving into adistributive and competitive market driven by market forces andincreased competition. With electricity amounting to a $200 billionper year market in the United States, the implications of thisrestructuring will naturally affect the rest of the world. Why is restructuring necessary? What are the components ofrestructuring? How is the new structure different from the oldmonopoly? How are the participants strategizing their options tomaximize their revenues? What are the market risks and how are theyevaluated? How are interchange transactions analyzed and approved?Starting with a background sketch of the industry, this hands-onreference provides insights into the new trends in power systemsoperation and control, and highlights advanced issues in thefield. Written for both technical and nontechnical professionals involvedin power engineering, finance, and marketing, this must-haveresource discusses: * Market structure and operation of electric power systems * Load and price forecasting and arbitrage * Price-based unit commitment and security constrained unitcommitment * Market power analysis and game theory applications * Ancillary services auction market design * Transmission pricing and congestion Using real-world case studies, this timely survey offers engineers,consultants, researchers, financial managers, university professorsand students, and other professionals in the industry acomprehensive review of electricity restructuring and how itsradical effects will shape the market.

(Uncorrected OCR) Abstract of thesis entitled Energy Allocation with Risk Management in Electricity Markets Submitted by LIUMIN for the degree of Doctor of Philosophy at The University of Hong Kong in March 2004 Global deregulation in the electrical power industry in the past decade has introduced the concept of a competitive electricity market In this new environment, electricity is traded the same way as other commodities. However, because electricity cannot be stored and its transmission is limited by physical and reliability constraints, electricity prices are substantially more volatile than any other commodity price. Confronted with this severe price volatility, generation companies (Gencos) need to find ways to protect their profits (or returns). The purpose of this thesis, which addresses the risk of price volatility in trading, is to develop an approach to the scheduling of energy trading with the objective of maximizing Gencos' benefits (profits or returns) and minimizing the corresponding risks. A Genco's energy can be traded either in the spot market or the forward contract market (or 'contract market' for short). Futures contracts and financial transmission rights (FTRs) can also be used to hedge the risks of spot price volatility and congestion charges respectively. With so many options, a Genco has to decide how to allocate its energy between the spot market and contract market and how much energy to trade in the futures and FTR markets, taking into consideration the risks of spot price and congestion charge. In other words, trading scheduling for a Genco involves the optimal allocation of its energy among multiple markets (i.e. the spot, contract, futures and FTR markets), with the aim of maximizing its benefit and minimizing the corresponding risk. Based on tre principles of modem portfolio theory and hedging, a sequential optimization approach is developed in this thesis for energy scheduling by Gencos in a multiple market environment. Using the pr.

Electricity Pricing In Transition is written to address the new issues facing utilities, retailers, regulators, and customers in the changing electricity market. It is organized into five sections. Section I deals with the new restructured organization that has emerged from yesterday's vertically integrated, regulated monopoly company. Section II deals with issues in competitive pricing. Section III reviews the role of demand response and product design in today's chaotic marketplace. Given the single importance of California's energy crisis and the fact that it will be studied for years to come, Section IV is devoted to studying the lessons learned from this crisis. The final section of the book deals with markets and regulations. This book will provide practitioners with guidance on how to avoid the major pitfalls in pricing electricity while the market is in transition by drawing upon the insights and lessons learned from the experience of others that are documented in this book.