Part 2 of this two-part special issue of The Journal of Energy Markets contains four papers that were presented at different energy seminars during 2011 at the Norwegian University of Science and Technology and Lillehammer University College. The summer 2012 issue of The Journal of Energy Markets contained the first three papers from these seminars.
The papers in this issue deal with the valuation of energy-switching real options, models for optimizing hydropower generation, surveying risk reporting practices from power companies and forecasting transmission congestion.
In the first paper, "Real input-output energy-switching options", Roger Adkins and Dean Paxson provide a method for the valuation of real options embedded in flexible energy facilities by introducing a model that has stochastic inputs and outputs with switching costs. The authors showthe facility value and the optimal switching strategy when the flexibility to switch between several operating and nonoperating states exists. An illustration is provided for a heavy crude oil production field that requires natural gas as input, with shutdown and restart switching costs. Their framework is fairly general and can be applied to several applications within manufacturing, distribution and transportation of energy products with switching costs.
The second paper, "A simplified approach for optimizing hydropower generation scheduling" by Frode Kjærland and Berner Larsen, presents a simplified model for optimizing hydropower scheduling for a small producer with a high degree of flexibility in selecting the hours with the highest prices. In their model, the authors find that it is optimal to run at full capacity in all the hours of the following day when hourly prices are greater than a given upper percentile of the hourly prices for the last two years, and not to run at all otherwise. Using a simulation study they find that a producer following this plan can achieve a 19% increase in income compared with a more naive strategy of generating at peak hours on weekdays.
The third paper, "Risk reporting to the board of directors: comparison of Norwegian power companies and banks" by Terje Berg and Sjur Westgaard, compares methods of reporting on enterprise risk management to the board of directors in a sample of Norwegian power companies and banks. Few survey studies based on in-depth interviews exist on this subject, and the paper sheds light on existing risk practices in industries with very different legislative requirements. The conclusion from the study is that, among the companies analyzed, the ideals of enterprise risk management are not generally implemented.
In the last paper in the issue, "Forecasting transmission congestion", Anders Løland, Egil Ferkingstad and Mathilde Wilhelmsen model and forecast transmission congestions. Transmission congestions create area price differences in systems like Nord Pool, so a method for predicting transmission congestions is valuable. Using combined forecasts for several different prediction models of net capacity utilization for the NO1 area of Nord Pool, the authors obtain promising results by analyzing the period from 2003 to 2009.
The ELCARBONRISK energy conferences consisted of a series of seminars with topics related to decision models for energy markets, and to risk analysis in particular. As many of the topics described and analyzed in this issue can (and will) be extended in various directions, we intend to follow this work up with other related seminars during 2012.
Decision Support Modeling in Energy Markets: Part 2
LETTER FROM THE GUEST EDITOR
Sjur Westgaard - Norwegian University of Science and Technology