Business & Money

Deck: 
Obtaining a position measurement in energy markets has become more complex and has increased financial risks for integrated utilities.
Fortnightly Magazine - November 15 2003
This full article is only accessible by current license holders. Please login to view the full content.
Don't have a license yet? Click here to sign up for Public Utilities Fortnightly, and gain access to the entire Fortnightly article database online.

Business & Money

Obtaining a position measurement in energy markets has become more complex and has increased financial risks for integrated utilities.

"What's your position?" The answer to that simple question in today's energy markets is anything but simple. In fact, answering this question may be the single most difficult challenge faced by a fully integrated energy firm in its efforts to manage risk. Position measurement, and therefore risk management, in today's deregulated energy market is complicated by the fact that weather, fuel costs, outages, transmission availability, embedded optionality, and a host of other interrelated factors all dramatically affect position on a real-time basis.

Without an accurate, granular, and unbiased estimate of position, risk management and generation optimization are impossible. Moreover, without consistent and timely position discovery, hedging programs cannot safely be implemented-and, of course, the efficiency and performance of the trading and marketing team cannot be evaluated.

Discovering, estimating, and valuing one's position requires a rigorous methodology and a computational architecture to back it up.

In late 2000, Cinergy Corp., the Cincinnati-based utility and one of the largest electricity trading companies in the United States, undertook a comprehensive review of its risk management methodology and systems. Cinergy was fully aware of the volumetric risks and embedded optionality in its merchant energy portfolio. However, its internally developed client-server system was not sufficiently up to the task of handling all of the complex data capture, valuation, storage, and presentation nuances of its complex deregulated portfolio.

This full article is only accessible by current license holders. Please login to view the full content.
Don't have a license yet? Click here to sign up for Public Utilities Fortnightly, and gain access to the entire Fortnightly article database online.