Advanced Search
MyIDEAS: Login

Relevance of Risk Capital and Margining for the Valuation of Power Plants: Cash Requirements for Credit Risk Mitigation

Contents:

Author Info

  • Lang, Joachim

    ()
    (E.ON AG, Controlling / Corporate Planning)

  • Madlener, Reinhard

    ()
    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

Abstract

In the electricity sector, most of the trades are still done in the OTC market without direct mitigation of credit risk. Newer discussions fuelled by the European Commission (EUCOM 2009a,b) show that there is a political will to enforce a stronger collateralization policy on all European derivatives markets, including the OTC markets. This is meant to secure the markets and prohibit arbitrage on regulatory regimes as a consequence of the financial crisis. However, collateralization does not come for free. In this study, we analyze the capital needs for margining based on commodity prices of 2007-2009 in conjunction with the clearing rules for margining of the European Commodity Clearing AG (ECC). We apply different hedging scenarios to state-of-the-art coal- and gas-fired power plants, and the sale of outright power in the German market. Based on the set-up of our analysis, we show that in absolute terms especially outright power has quite significant cash needs for trading, whereas coaland gas-fired power plants have less than half the needs of outright power. In relative terms for the fossil-fired power plants, we find that coal-fired power plants have a relative advantage in comparison to gas-fired plants. The need for risk capital per MWhth of coal-fired power plants is comparably lower. A major reason for this is the standard notation of coal in US-$ per ton: As one ton of coal contains approx. 7 MWh of thermal energy (which is the relevant unit for the calculation of the fuel consumption), the price change for coal in US-$ (or €) per MWh is only approximately one seventh compared to the notation in metric tons. This translates into comparably lower margining needs for the fuel variation margin of a coal-fired power plant vs. a gas-fired power plant, offering a variety of further research questions.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.fcn.eonerc.rwth-aachen.de/global/show_document.asp?id=aaaaaaaaaagvvbi
File Function: Full text
Download Restriction: no

Bibliographic Info

Paper provided by E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) in its series FCN Working Papers with number 1/2010.

as in new window
Length: 56 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:ris:fcnwpa:2010_001

Contact details of provider:
Email:
Web page: http://www.eonerc.rwth-aachen.de/fcn
More information through EDIRC

Related research

Keywords: Credit risk mitigation; margining; collateralization; risk capital; power plant valuation; portfolio optimization;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ris:fcnwpa:2010_001. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Yasin Sunak).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.