Ebook Quantifying Risk in the Electricity Business: A RAROC-based Approach
In 1997 the EU directive 96/92/EC started the deregulation process of European electricity markets with the goal of achieving a more efficient supply with electricity in competitive markets. In Germany this directive was implemented through the amendment of the power industry law in 1998. This liberalization led to the establishment of a regulated electricity market, which institutionalized itself in two electricity exchanges, the EEX in Frankfurt and the LPX in Leipzig. In the year 2002 both exchanges merged to bundle market activity.
Electricity companies were forced to deal with the new situation. In reaction, energy trading companies were established, which should act as intermediate between the power generating and the sales businesses, as well as with the outside market. These trading companies are responsible of capturing and evaluating the risks occurring when electricity is traded at a spot and future market.
The exchange itself is not the main distribution channel, since most customers do not want to bother to buy electricity at an exchange. They rather make direct contracts with the electricity company to provide them with electricity for a fixed price per unit.
Entering such a contract, also called full load contract, the electricity trader commits himself to the obligation to deliver electricity for a fixed price. This means the trader is willing to bear several kinds of risks in place of the customer, for which the trader should be compensated. In the following work we want to quantify the risk related to full load contracts. Furthermore we want distinguish between customers according to their load profiles, which are a main determinant of the riskiness of the contract.
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