Multiple zone power forwards: A value at risk framework

Abstract

Over the 1990s, deregulated power markets in New-England provided zones with fluctuating spot prices. Such prices have a notoriously high volatility, owing to the difficulty of storing electrical energy and the delays needed to adjust generation levels. In this context, forward contracts have become increasingly popular and understanding their dynamic is a problem facing many market players. This paper proposes a parsimonious parametric model, based on the price series of all n-month forward contracts (n = 1,2,3...), encompassing multiple zones. The model is then used for value at risk forecasts, which are backtested and compared with the ones in use by the risk management unit of an important electricity producer. Extensions to include natural gas and power-relevant oil-based future markets are discussed.Forward curve Value at risk Power markets Energy markets