Risk management in the competitive electric power industry

From 1990 until present day, the electric power industry has experienced dramatic changes worldwide. This recent evolution of the power industry has included creation and multiple iterations of competitive wholesale markets in many different forms. The creation of these competitive markets has resulted in increased short-term volatility of power prices. Vertically integrated utilities emerged from years of regulatory controls to now experience the need to perform risk assessment. The goal of this dissertation is to provide background and details of the evolution of market structures combined with examples of how to apply price risk assessment techniques such as Value-at-Risk (VaR). In Chapter 1, the history and evolution of three selected regional markets, PJM, California, and England and Wales is presented. A summary of the commonalities and differences is presented to provide an overview of the rate of transformation of the industry in recent years. The broad area of risk management in the power industry is also explored through a State-of-the-Art Literature Survey. In Chapter 2, an illustration of risk assessment to power trading is presented. The techniques of Value-at-Risk and Conditional Value-at-Risk are introduced and applied to a common scenario. The advantages and limitations of the techniques are compared through observation of their results against the common example. Volatility in the California Power Markets is presented in Chapter 3. This analysis explores the California markets in the summer of 2000 including the application of VaR analysis to the extreme volatility observed during this period. In Chapter 4, CVaR is applied to the same California historical data used in Chapter 3. In addition, the unique application of minimizing the risk of a power portfolio by minimizing CVaR is presented. The application relies on recent research into CVaR whereby the portfolio optimization problem can be reduced to a Linear Programming problem.