Power Market I: Exercise 1

1. Identifying risk A municipal utility delivers to its supply area an average 3200 GWh in the winter and 2600 GWh in the summer. It produces itself 2400 GWh in the winter and 2700 GWh in the summer. To balance the supply in the winter semester, the company entered a delivery contract of 2000 GWh base load per year with a power plant company for a period of 10 years. The excess energy in the summer is to be sold on the free market. a) What risks does the company face? b) How does the risk assessment change if the consumption of the supply area annually increases by 2%? 2. Forward / Futures contracts There are two types of Forward contracts: Forward contracts agreed on a bilateral basis (over-the-counter (OTC)) or standardized products that are traded on the energy exchange (Futures). Assign the following characteristics to either a Future or a Forward 1 2 3 4 5 6 7 8 9 10 Flexible definition of contract terms The own bids are anonymous The counter-party risk is low Only a limited amount of products exist The cancelation of a contract can easily be achieved The market and the prices are transparent The market participants trade with a counter-party The contracts can be traded without large efforts The solvency of the counter-party has to be monitored permanently Maturity longer than 6 years are possible Future Forward

3. Price hedging with futures contracts You are responsible for the power purchases of a German municipal utility. For the second quarter of 2014 you are planning on purchasing 20 MW peak-load on the spot market. For the same time period you entered a long position for 20 MW peak-load on the EEX (peak-load futures contract for Q2-2014) at a price of 44.81 / MWh. a) Draw the payoff diagram for the physical and contractual positions! b) What would your cash flow be at the end of the second quarter of 2013 if the average market price during this period was 47.40 / MWh? 4. Managing the counter party risk at the futures market of the EEX How does the EEX cover the financial risk if a market participant becomes insolvent? 5. Spot market bid and ask curves For a particular hour of the next day the following bids and asks are given. Bid (supply) Volume (MWh/h) 50 20 30 Ask (demand) Volume (MWh/h) 10 30 20 10 30 Price (/MWh) 30 35 50 Price (/MWh) no limit 55 45 32 30

a) Draw the curves for bid and ask! b) Determine the market clearing price! c) What is the volume of energy traded in that hour, i.e. the energy that will be delivered on the next day?