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Cigre Study Committee C5- Brazilia workshop

Market Structures and Institutions

RISK MANAGEMENTSvein Storstein Pedersen

Convenor of TF C5-01-02

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Electricity as a Risky Commodity• Basic Electricity regulation changed

Division between competitive sector and the natural monoplies introduced

• Developing market institutionsTailor-made spotmarkets on national traditions together with the bilateral contracts

• Increased cross-border tradingInternational harmonisation of national markets lacking

• New market participantsIn addition to the producers, the end-users and the traders enter the markets and get commercially exposed

• Spot and forward prices High volatility makes a profitable business for some and a

risky business for all

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Liberalisation of Electricity Markets

Price-index

Bilateral marketOTC

Power exchange- Spot / physical delivery- Financial products

Traders and brokersenter the market

Free access to the grid

OTC-derivates

Open market - transparent- many market participants - high volume in financial

trading

Monopolistic market- bilateral trading- intransparent- producers trade among themselves

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Risk Management of ElectricityPossible definitions

• Risk: Costs of future uncertainty– Involves also technical, institutional and legal

issues

• Risk Management: Cost-reduction tool– Risk Management of Electricity is a mixture of

standard economical theory and tailor-made solutions based on the maturity of the actual electricity market

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TF C5-01-02 Risk Management Previous Cigre-work

TF 38-05-09Methods and tools for contracts in a competitive framework

TF 38-05-12Portfolio and Risk Management for Power Producers and Traders in an Open Market

Final Report July 2001

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TF C5-01-02 Risk ManagementScope of the new task force

The new TF shall give a detailed exploration of risk management methods for market players in a competitive electricity market taking into account previous CIGRE work.

The detailed scope of new TF should be discussed and decided by the participants at the first meeting. Previous to this meeting all the participants should be familiar with the previous CIGRE work.

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TF C5-01-02 Risk ManagementThe detailed discussion of the scope (1)

• Type of contract portfolioContracts defines the rights and obligations for a market participant. Trading portfolios consisting of only financial contracts are very different from portfolios consisting of physical generation.

• Transmission rights and tariffs Contracts offered from the grid owner/operator for the connection of a market participants and the corresponding rights and obligations for the use of the grid.Handling of congestions and risk management products for the use of the grid.

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TF C5-01-02 Risk ManagementThe detailed discussion of the scope (2)

• Market institutions Mature markets includes more advanced financial contracts and thus more risk management flexibility

• Market imperfectionThe risk management methods might be very different for markets where some players may apply market power.

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TF C5-01-02 Risk ManagementInitial proposed timetable

• December 2003 – Develop and determine questionnaire

• April 2004 – Collect and compile information

• August 2004 - Discuss and determine scope of final report

• April 2005 – Discuss and prepare draft final report

• June 2005 – Final report

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TF C5-01-02 Risk ManagementAdditional TF-members requested

• Nomination of TF-members from SC-members to the TF-convenor

• Asking for new nominations in addition to the existing ones

• Preferable time limit for new nominations:

November 1st 2003