Measuring and
Managing Energy
Risk
Chris M. Schlegel
Manager, Risk Analysis Services
Global Association of Risk Professionals
June 2016
Buckhead Club
Atlanta
The views expressed in the following materials are the
author’s and do not represent the views of his employer
or any of its affiliates or entities.
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The views expressed in the following material are the
author’s and do not necessarily represent the views of
the Global Association of Risk Professionals (GARP),
its Membership or its Management.
3
Energy Risk: Measuring and Managing
High level on the space: power, gas, coal
Commodity Hedge
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The Space, Illustrated
[Link]
Consider in particular:
US Energy mapping [Link]
Electricity Data Browser [Link]
AEO preview [Link]
AEO 2015 full [Link]
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US Energy – The Landscape
Electricity Crude Oil
Transmission Pipelines, rail terminals
Natural Gas Natural Gas
Pipelines, imp/exp terminals Underground storage
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Source: [Link]
Electricity Generation: By Levels…
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[Link] Report 1.2 a
… and by Growth
Gas: +150%
Coal: -42%
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[Link] Report 1.2 a
Electricity Generation: The Mix by 2030…
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[Link]
… and 2030 Renewables
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[Link]
US Nat Gas
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LNG: 2013
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[Link]
LNG: 2016
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Current chart at: [Link]
Shale’s long reach.
On April 25, 2007, pursuant to section 7(c) of the Natural Gas Act, Port Dolphin filed an application seeking authority
to construct and operate in Manatee County, Florida, the onshore portion of a natural gas pipeline associated with
Port Dolphin’s proposed deepwater natural gas port. The purpose of this project was to interconnect the onshore
pipeline to an interstate and an intrastate pipeline. …
Since the inception of Port Dolphins’ plan for the Deepwater Port, the natural gas industry has substantially changed.
These changes resulted in the United States becoming an exporter rather than an importer of natural
gas. …
As a result of the catastrophic changes in circumstances, Port Dolphin is abandoning its plans for the
Deepwater Port and all of the associated construction. Subsequently, Port Dolphin no longer requires the certificates
and waivers that the Commission had previously granted…
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Source: [Link] Emphasis added.
Oil & Gas
$37/b in 2016 Sub $5 gas forever
$77/b in 2020
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[Link]
Location: Demand does not Equal Supply
US Coal
Source: [Link]
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Equity Valuations
Combined Market Capitalization. Also: debt trading levels
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Equity Valuations II
Combined Market Capitalization. Also: debt trading levels
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Commodity Products
Gas Power Weather Coal Uranium
Swap
Call
Put
Collar – as costless or near-costless
Gas as power proxy
Liquidity
Term: Dailies vs. Long Term
Long term management of credit and margin risk
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Example: Structured Power Hedge
Sell peak power forward at a fixed price: 50 MW 5X16. Buy back in the dailies (diversified
source)
At same time: receive floating, pay fixed at HH. No basis risk (location)
Roll the hedge once / year
Summary:
– Power = receive fixed (fwd), pay floating (spot)
– Gas = receive floating (settle), pay fixed (lock in at point of hedge execution)
Hypothetical perfect hedge locks in the spread: receive floating gas leg cancels pay floating
power leg (credit risk remains), thus locking in the spread between receive fixed power and pay
fixed gas – both of which are known today
Key – over the life of this hedge, spot power prices must track spot gas prices
Credit risk management
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Hedging Diversified Power with Gas: Watch the Slope
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T/F/U: Hedging is for ...
Defined talking points
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The Hedging Literature – looking where the light is
“Where did you lose your keys”
What is the objective function
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