Editor: Christoph Weber and Daniel Ziegler
Published: 28 Mar 2012
Papers in this issue
by Dogan Keles, Rupert Hartel, Dominik Most and Wolf Fichtner
by Kevin Metka and Reik Borger
International Ruhr Energy Conference, Essen 2009
Christoph Weber and Daniel Ziegler
This special issue of The Journal of Energy Markets contains three papers that were presented at the International Ruhr Energy Conference held on October 5-6, 2009, in Essen (Germany). The conference took place at a time when the world was still living in the shadow of the subprime crisis. Although this affected the commodity markets only in an indirect way, its ramifications triggered an almost unprecedented collapse of commodity prices from an all-time high in the middle of 2008 to an interim low in early 2009. These turbulent times gave the subject of the conference, "Stochastics and Risk Modelling for Energy and Commodity Markets", a particular topicality. Serious doubts were cast over the ability of companies to handle risk in reality, either because the tools provided by science have revealed themselves to be insufficient or because companies lacked the necessary understanding to apply them properly.
The first paper in the issue, "Do trading and power operations mix? The case of Constellation Energy Group in 2008" by John E. Parsons, delves into this painful subject. His insightful case study on Constellation Energy Group reveals unpleasant similarities with the origins of the subprime crisis. Parsons demonstrates the dangers that arise from a careless adoption of particular tools from the financial industry. Specifically, he argues that the illiquidity of commodities makes instruments like value-at-risk (VaR) inappropriate. The consequences of this are a significant underestimation of contingent capital requirements and a misconception of risk and profitability when suitable countermeasures are not used.
The 2011 insolvency of TelDaFax in Germany highlighted the fact that the retail business in particular is suffering from low margins and frequently inappropriate pricing and risk management approaches. Kevin Metka and Reik Börger make a very valuable contribution focusing on this topic with their paper "Valuation of structured retail electricity contracts with market models". The authors examine the analogies between products in wholesale electricity markets and structured LIBOR products, illustrating how these can be used for pricing delivery contracts and discussing how specific features of both products (such as call rights for customers), and of the market as a whole (such as the irrational behavior of retail customers), can be handled.
At the other end of the value chain, generation assets also pose specific challenges. One issue that was discussed with particular vigor by the conference participants was the question of how to adequately bridge the gap between the short-to-medium-term perspective on stochastics and the risks of energy trading on the one hand, and the longer-term focus of traditional energy economics on the other. The final paper in the issue, "Compressed-air energy storage power plant investments under uncertain electricity prices: an evaluation of compressed-air energy storage plants in liberalized energy markets" by Dogan Keles, Rupert Hartel, Dominik Möst and Wolf Fichtner, makes an interesting contribution to the search for a solution to this problem by looking at a novel generation asset: compressed air energy storage (CAES). This technology may play an important role in the recently announced transformation of the German energy system by facilitating the integration of renewables. At the same time, the value of the diabatic CAES, with its combination of storage capacity and additional energy input at withdrawal, is difficult to ascertain. The authors combine a regime-switching electricity price simulation with a detailed operation optimization to assess the value of a CAES investment.
All in all, the statistics we gathered from the conference and the positive feedback we received from the participants make it clear that our promotion of a collaboration between academia and industry has been successful. This will encourage us to work on a follow-up in the near future.
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