IDEAS home Printed from https://ideas.repec.org/p/ris/fcnwpa/2010_001.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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.

Suggested Citation

  • Lang, Joachim & Madlener, Reinhard, 2010. "Relevance of Risk Capital and Margining for the Valuation of Power Plants: Cash Requirements for Credit Risk Mitigation," FCN Working Papers 1/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  • Handle: RePEc:ris:fcnwpa:2010_001
    as

    Download full text from publisher

    File URL: http://www.fcn.eonerc.rwth-aachen.de/global/show_document.asp?id=aaaaaaaaaagvvbi
    File Function: Full text
    Download Restriction: no

    Citations

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


    Cited by:

    1. Dergiades, Theologos & Madlener, Reinhard & Christofidou, Georgia, 2012. "The Nexus between Natural Gas Spot and Futures Prices at NYMEX: Do Weather Shocks and Non-Linear Causality in Low Frequencies Matter?," FCN Working Papers 17/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Sep 2013.
    2. Harmsen - van Hout, Marjolein J.W. & Herings, P. Jean-Jacques & Dellaert, Benedict G.C., 2013. "Communication network formation with link specificity and value transferability," European Journal of Operational Research, Elsevier, vol. 229(1), pages 199-211.
    3. Melchior, Tobias & Madlener, Reinhard, 2012. "Economic evaluation of IGCC plants with hot gas cleaning," Applied Energy, Elsevier, vol. 97(C), pages 170-184.
    4. Achtnicht, Martin, 2010. "Do environmental benefits matter? A choice experiment among house owners in Germany," ZEW Discussion Papers 10-094, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    5. Rohlfs, Wilko & Madlener, Reinhard, 2011. "Multi-Commodity Real Options Analysis of Power Plant Investments: Discounting Endogenous Risk Structures," FCN Working Papers 22/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    6. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "An Evaluation of Attribute Anchoring Bias in a Choice Experimental Setting," FCN Working Papers 6/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    7. Bernstein, Ronald & Madlener, Reinhard, 2011. "Responsiveness of Residential Electricity Demand in OECD Countries: A Panel Cointegation and Causality Analysis," FCN Working Papers 8/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    8. Kraas, Birk & Schroedter-Homscheidt, Marion & Pulvermüller, Benedikt & Madlener, Reinhard, 2011. "Economic Assessment of a Concentrating Solar Power Forecasting System for Participation in the Spanish Electricity Market," FCN Working Papers 12/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    9. Michelsen, Carl Christian & Madlener, Reinhard, 2011. "Homeowners' Preferences for Adopting Residential Heating Systems: A Discrete Choice Analysis for Germany," FCN Working Papers 9/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    10. Rohlfs, Wilko & Madlener, Reinhard, 2010. "Cost Effectiveness of Carbon Capture-Ready Coal Power Plants with Delayed Retrofit," FCN Working Papers 8/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Dec 2010.
    11. Gampert, Markus & Madlener, Reinhard, 2011. "Pan-European management of electricity portfolios: Risks and opportunities of contract bundling," Energy Policy, Elsevier, vol. 39(5), pages 2855-2865, May.
    12. Lang, Joachim & Madlener, Reinhard, 2010. "Portfolio Optimization for Power Plants: The Impact of Credit Risk Mitigation and Margining," FCN Working Papers 11/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    13. Lohwasser, Richard & Madlener, Reinhard, 2013. "Relating R&D and investment policies to CCS market diffusion through two-factor learning," Energy Policy, Elsevier, vol. 52(C), pages 439-452.
    14. Rohlfs, Wilko & Madlener, Reinhard, 2013. "Challenges in the Evaluation of Ultra-Long-Lived Projects: Risk Premia for Projects with Eternal Returns or Costs," FCN Working Papers 13/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    15. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "The Impact of Green Framing on Consumers’ Valuations of Energy-Saving Measures," FCN Working Papers 7/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    16. Ernst, Christian-Simon & Hackbarth, André & Madlener, Reinhard & Lunz, Benedikt & Sauer, Dirk Uwe & Eckstein, Lutz, 2010. "Battery Sizing for Serial Plug-in Hybrid Vehicles: A Model-Based Economic Analysis for Germany," FCN Working Papers 14/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Jun 2011.

    More about this item

    Keywords

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

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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: (Hendrik Schmitz). General contact details of provider: http://edirc.repec.org/data/fceonde.html .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.