Risk Management and Portfolio Optimization for Gas- and Coal-fired Power Plants in Germany: A Multivariate GARCH Approach

Georgios Charalampous () and Reinhard Madlener
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Georgios Charalampous: International Hellenic University, Postal: School of Science and Technology, 14th km Thessaloniki/Moudania, 57001, Thermi, Greece

No 23/2013, FCN Working Papers from E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN)

Abstract: This study revisits risk management in the German power market, specifically focusing on conventional thermal power generation. The subsidizing and prioritizing of electricity produced from renewable energy sources (RES) by means of the Renewable Energy Sources Act (EEG) has changed the market’s structure. Specifically, it has led to an erosion of the revenues gained by coal- and natural-gas-fired power plants and, therefore, undermined the competitiveness of traditional power generation. This fact has brought to the forefront the necessity of mitigating the risk exposure in order to tackle the worsening situation for conventional power plant owners. The approach adopted in this paper is to assess and choose the optimum forward contract for hedging the power output and fuel purchase simultaneously. This is done by evaluating the hedging effectiveness of the futures contracts available at the European Energy Exchange (EEX) in Leipzig. The hedging performance is evaluated on the basis of a multivariate GARCH model (the BEKK model). Finally, in the framework of portfolio optimization, we construct the efficient frontier, so as to identify the point at which the combination of spot and forward prices gives the minimization of risk exposure.

Keywords: Risk management; Energy markets; Energy derivatives; Hedging strategies (search for similar items in EconPapers)
JEL-codes: G11 Q59 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2013-12
New Economics Papers: this item is included in nep-ene, nep-reg and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:fcnwpa:2013_023

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