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

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  • Charalampous, Georgios

    (International Hellenic University)

  • Madlener, Reinhard

    (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.

Suggested Citation

  • Charalampous, Georgios & Madlener, Reinhard, 2013. "Risk Management and Portfolio Optimization for Gas- and Coal-fired Power Plants in Germany: A Multivariate GARCH Approach," FCN Working Papers 23/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    • Handle: RePEc:ris:fcnwpa:2013_023
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    Cited by:

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    2. Adams, R. & Jamasb, J., 2016. "Optimal Power Generation Portfolios with Renewables: An Application to the UK," Cambridge Working Papers in Economics 1646, Faculty of Economics, University of Cambridge.

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    More about this item

    Keywords

    Risk management; Energy markets; Energy derivatives; Hedging strategies;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q59 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Other

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