Energy and Power Risk Management: New Developments in Modeling, Pricing and Hedging

Book Description

Praise for Energy and Power Risk Management

"Energy and Power Risk Management identifies and addresses the key issues in the development of the turbulent energy industry and the challenges it poses to market players. An insightful and far-reaching book written by two renowned professionals."
-Helyette Géman, Professor of Finance
University Paris Dauphine and ESSEC

"The most up-to-date and comprehensive book on managing energy price risk in the natural gas and power markets. An absolute imperative for energy traders and energy risk management professionals."
-Vincent Kaminski, Managing Director
Citadel Investment Group LLC

"Eydeland and Wolyniec's work does an excellent job of outlining the methods needed to measure and manage risk in the volatile energy market."
-Gerald G. Fleming, Vice President, Head of East Power Trading, TXU Energy Trading

"This book combines academic rigor with real-world practicality. It is a must-read for anyone in energy risk management or asset valuation."
-Ron Erd, Senior Vice President
American Electric Power

Customer Reviews:

A good book for the designer of energy risk managment tools.......2005-09-29

If you develop computer code in this field it could be a help, but if you are more interested in knowing more about the ways to avoid risk in the energy business I would recommend another book. There are also not enough practical examples to give a good understanding of the principles.

Dynamic hedging is not explained to the extent wanted. The examples are also not very clear.

Not for the average industry professional.......2004-08-20

The authors have written a very detailed, well structured text on the different models and developments in the power and fuel markets. It's a very complex, mathematical analysis of the different techniques being used, and the text may lose a number of readers in the overly rigorous formulations. For those involved in risk management, market modeling, or asset management, the book would be a good secondary or tertiary read after you've established a sound understanding of stochastic models and current hedging and pricing techniques in the marketplace. For the layman in the industry, the book will be far too heavy and not worth the read.

Good overview.......2004-06-07

The management of risk in the context of energy or weather is quite different than in other contexts, due to the peculiarities of the data that occurs in energy prices. The high volatility of energy prices can range, as the authors of this book point out, between 50-100% for gas, to 100-500% for electricity. No doubt this kind of volatility, and other properties such as correlations and mean reversion, entails that some different mathematical strategies for modeling energy derivatives be devised. The authors give a good tour of some of these strategies, and anyone interested in energy derivatives will gain a lot of insight into their modeling when reading this book. Due to space constraints, only chapters 5 and 7, which this reviewer considered the most important of the book, will be reviewed here.

In chapter 5 the author presents techniques for energy modeling that go beyond the used of the convenience yield by using forward pricing techniques. The goal is to describe the dynamics of future contract prices that takes into account the correlations with other futures, and not on the price evolution of a single contract. Thus it is the `forward curve' that is relevant for obtaining a useable model for derivative cash flow. The HJM model is presented as one of these, with changes in the forward curve over a particular time interval represented as a linear combination of random perturbations. For energy markets, each perturbation is specified by a deterministic shape function multiplied by a Gaussian factor. The unobservability of the factors determining the forward curve evolution makes the use of historical data mandatory if the parameters are to be estimated. But lack of sufficient historical data and its nonstationarity complicate this estimation. The authors discuss the Schwartz-Smith multi-factor model as an example of a forward curve dynamics model and give some solutions. They then move on to a model that specifies the dynamics for only the contracts that are actually traded, which in the literature are called `market models.' The model they actually discuss is a multivariate geometric Brownian motion representation of the forward curve dynamics, where the volatility and drift functions are linear functions of the forward prices. The authors then derive the `discrete string models', where it is assumed that the number of factors is equal to the number of contracts, and the random factors are governed by ordinary Brownian motion. String models are represented as having the advantage of being able to directly observe the factors in the historical data. The authors apply string models to multi-commodity cases, and discuss an example for monthly forward prices. They show how to match the current forward curve, the option prices, and the correlation structure for this model.

The discussion in chapter 7 revolves around finding better models for the dynamics of power prices that capture the special properties of energy prices, such as mean reversion and seasonality, and the need for stable models. They therefore introduce `hybrid models', which they claim give a more natural representation of the dynamics of power prices, make use of nonprice forward-looking information, and can take the historical data on power prices and then extend it to information on fuel prices, outages, etc. The construction of these models is based on the use of nonlinear transformations on a collection of random variables. The random variables are essentially the system demand, natural gas and oil price, outages, emission prices, and weather at a particular time. The power price then can be written as a function of the dynamics of these factors, the latter written by the authors in terms of the corresponding tradables. Recognizing that hedging cannot be done on some of these factors, they adjust the power price formula so that the power tradables, i.e. the forwards and option prices, are exactly matched. This matching transformation is chosen so that if the forward contracts and options are priced using the adjusted formula, one recovers the exact current prices. The model, as the authors summarize it, is an attempt to explain the behavior of the tradables in terms of the evolution of the underlying factors and static adjustments to the terminal probability distribution. Historical information on the tradables and spot products is not used to calibrate the model, but it is used to validate the model. The authors distinguish between `reduced-form' hybrid models, where the transformation is calibrated from the historical prices, and `fundamental' hybrid models, where the transformation is calibrated from the market structure and is only tested on the historical prices. The authors discuss an example of a reduced-form hybrid model that is heavily parametrized, but has the advantage of using price data more efficiently. The rest of the chapter concentrates on fundamental hybrid models, with the author first discussing how power prices are formed in competitive markets. They consider a typical pool market, with the price determined via auction mechanisms. The authors then try to identify and characterize the underlying random variables that actually affect power prices. The time series for the price of power is written in terms of the demand using a `bid stack' function. The bid stack function is approximated by a `generation stack' that is found for a given time by sorting generation units by their generation costs. This approximation is checked by comparing the marginal generation costs generated by the generation stack with the distribution of power prices determined by the time series via the bid stack. There should be agreement in both approaches between the higher order moments. This comparison forms the basis of the authors' hybrid approach to modeling power prices. A transformation is found which relates the marginal generation costs to the distribution of power prices with the requirement that the prices of market instruments used for calibration are matched, and the higher moments are (approximately) preserved. The transformation is not unique, and in fact a family of transformations induced by the multiplication and stack scaling operators can be found.

Excellent subject treatment.......2004-05-06

Until now there were a handful of papers, precious few books, and mostly inside proprietary models and experience that dealt with the complex subject of power trading and all its flavors. This book provides a nice summary of many of the present issues. The treatment of the subject is somewhat mathematically rigorous, so the book might not be for traders as much as it is for quants or risk managers.

To me, the greatest strength of the book lies in its fairly detailed analysis of what DOESN'T work, i.e. why common models and methods from the financial and other commodity realms can not be successfully grafted onto the energy market without risking significant valuation and cash flow prediction errors. The hybrid model they formulate towards the end of the book is very similar to Skantze and Ilic (2001). The departure from most previous models is that they attempt to use the markets to formulate and calibrate the structure instead of relying too much on past historical price/load data, which without some empirical understanding of the underlying processes, is fraught with danger due to rapidly evolving nature of the power market (or at least once rapidly evolving--it seems to be a little static at the moment).

Some familiarity with the market and stochastic/statistical mathematics is assumed. References to specific topics and more in depth analysis of particular subjects are good. The authors have a grip on real-world trading, risk, and cashflow issues, which makes this a useful reference for just about anyone associated with those aspects of the power market. I recommend it.

excellent book.......2003-03-18

Extremely well written and right to the point, with the appropriate level of technical detail, Eydeland and Wolyniec's Energy and Power Risk Management is arguably the best book on the subject. A must have for every professional in the industry.

Average customer rating:

Nice book to get a nice start
Gaining a strategic understanding of pricing in daily life
Generalista
Very Relevant Material
too specific and at the same time too general

Power Pricing
Robert J. Dolan , and Hermann Simon
Manufacturer: Free Press
ProductGroup: Book
Binding: Hardcover

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ASIN: 068483443X

Book Description

In today's hypercompetitive global marketplace, a company's pricing policy can make or break the bottom line. Yet a surprising number of firms attempt to increase profits without the aid of a carefully and creatively designed pricing strategy. Now, in this long-awaited book, the world's two leading price experts Robert J. Dolan and Hermann Simon take managers beyond conventional thinking to show how their breakthrough system of "power pricing" will improve the bottom line by an order of magnitude. They destroy popular but not necessarily financially savvy ideas on pricing, such as relying on a standard markup on cost rule. They expose as passive the "strategy" of letting the market or a competitor "set the price." But the key is in what they provide: the tools by which the pedestrian pricer can become a "power pricer" who achieves quantum leaps in financial performance by aggressively implementing sophisticated pricing strategies.

Dolan and Simon combine their international expertise and know-how to reveal the latest breakthroughs in pricing tactics. Drawing on their firsthand experience with firms throughout the world, they make available for the first time the logic behind the actual practices of "power pricers" engaged in fierce global competition. Market segmentation, promotional pricing, competitive strategic pricing, international pricing, nonlinear pricing, interrelated product line pricing, and time-customized pricing are just a few of the crucial concepts which the authors explore and explain when and how to implement. The authors' approach to creating "power pricers" is twofold. They specify the practices of the strategic pricers among the world's most successful firms and then lay out a four-dimensional system to attain this level of pricing sophistication and resulting profit improvement. Dolan and Simon draw their portrait of the power pricer in four critical dimensions: viewpoint on pricing, fact file support pricing, tools and scope of analysis, and determination and implementation.

The authors argue that firms must view pricing as a key and highly manageable element in the profit equation, worthy of attention equal to that accorded to sales volume and costs. Companies must have data at their finger tips which are more accurate, timely, relevant, and dissaggregated than their competitors'. Using these data to create a systematic analysis of customers and competitors, companies will be able to create and assess pricing scenarios to achieve long-term profitability.

This targeted, quadrupled approach to transforming the bottom line by managing price leaves no strategy or option unturned. Power Pricing is a highly detailed yet practically focused book which will become required reading for business leaders; general managers; marketing, product, and brand managers; accountants, financial managers, and marketing students, world-wide.

Customer Reviews:

Nice book to get a nice start.......2007-08-07

I used this book for my job when I was asked to do pricing for a new product. It may not be the best book for that. But it did give me some prespective of what all things I should take into consideration. It helped me prepare a good model which helped compiled thoughts of everyone. I am still working on this pricing excercise and I feel that after a while, I will through away the model, but this books examples, stress on real profit drivers, importance of variable costs helped me concentrate at right drivers in the begninning. I would like to go for better, more practical book with some good mathematical models.

Gaining a strategic understanding of pricing in daily life.......2003-08-01

Why does there exist such a variety of pricing schemes for different products and why do we see different prices for the same product, depending on who buys it when, where, and how? This is a branch of microeconomics called price discrimination. Price discrimination questions are among the most directly observable ones for students, particulary those who are unlikley to study more economics or business. I therefore focus on these questions in teaching managerial economics in an organizational management graduate program.

Dolan's and Simon's book is therefore of some interest to me. These two management consultants have written an extremely practical and non-academic book which explores the actual practice of business pricing with greater sophistication than found in most standard applied micreconomics texts or many business marketing texts. The main markets for this book, I suspect, are students, having graduated but still disatisifed with the overly theoretical approach in their microeconomics classes, and business managers, especially in medium to large companies, for whom pricing is a very dynamic and strategic issue.

I doubt this book is used as a main teaching text, nor would I recommend it. Its basic concepts are hardly novel and are found in any microeconomics or marketing text.The presentation of the basic concept of price elasticity is somewhat long and tedious (it is usually done in less than a page in a standard microeconomics text). However, the application of this concept -and illustrations of how businesses can use it practically - makes for a very rich discussion.

What is useful in their book is the variety of examples of actual business settings where practical pricing decisions have to be made which can apply several different concepts. How globalization affects pricing decisions is given considerable attention in this book. I did not find the final section on implementation of priing strategy in organizations as insightful as the middle chapter which is more analytical.

For teaching and learning purposes, this could be a useful back-up resource, if used judiciously with a more standard text.

Generalista.......2001-03-18

Me parece que este libro da ideas básicas de las estructuras de precio usadas actualmente, sin embargo toca cada tema muy superficialmente y al menos en mi caso tuve necesidad de comprar otro libro sobre el tema con la idea de profundizar mas en las estructuras de precio no lineales.

Very Relevant Material.......2001-02-23

I work in the small appliance business. Price is one of the largest issues facing our industry. Dolan combines textbook economic theory, practical applications and real world examples to spin an enticing web of price application. This is a must read for : former economics majors who wish they had pursued a graduate degree, marketing people who have pricing authority (or wish they did) and sales people. The underlying message is reinforced by example.. price on customer perceived value. A great "pass around" text for co-workers, its not terribly academic, but you must keep with it in the slow chapters.

too specific and at the same time too general.......2000-03-16

Needing literature for my thesis I found this book. Looks promising, but quotes like "global brands coupled with differentiated prices are not possible" immediately dismiss this book as a good source of reliable info. I just have to mention the differing prices of MC Donalds throughout the world, and you know this quote is really worthless. Of course the quote has some meaning for high priced goods, but for almost all fast moving consumer goods this quote is rubbish. I think it would be useful to add to a future version of this book that this remark is more valid for high priced goods.

Second point that I want to make is that the author thinks all producers have factory outlet stores or that distributors don't have a supplier. But this is probably my business administration background asking for a real perspective on prices, instead of just one isolated part. Mr. Dolan please read some distribution channel management literature! There are suppliers and there often is a retail channel that has some power in setting their own prices (especially in EUROPE)It is not clear from what perspective the author is looking.

And last of all, if you write a better version, please change the title, the best thing that I can say about the current title is that it fits the book.

Average customer rating:
Electricity Markets: Pricing, Structures and Economics (The Wiley Finance Series)
Chris Harris
Manufacturer: Wiley
ProductGroup: Book
Binding: Hardcover

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Electricity Market Reform: An International Perspective (Elsevier Global Energy Policy and Economics Series) (Elsevier Global Energy Policy and Economics Series)

Energy and Power Risk Management: New Developments in Modeling, Pricing and Hedging

Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach (The Wiley Finance Series)

Understanding Today's Electricity Business

Power System Economics: Designing Markets for Electricity

ASIN: 0470011580

Book Description

Understand the electricity market, its policies and how they drive prices, emissions, and security, with this comprehensive cross-disciplinary book. Author Chris Harris includes technical and quantitative arguments so you can confidently construct pricing models based on the various fluctuations that occur. Whether youre a trader or an analyst, this book will enable you to make informed decisions about this volatile industry.

The Power of Positive Profit: How You Can Improve Any Bottom Line in Sales, Marketing, and Management with MoneyMath

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The Power of Positive Profit

The Power of Positive Profit: How You Can Improve Any Bottom Line in Sales, Marketing, and Management with MoneyMath
Graham Foster
Manufacturer: Wiley
ProductGroup: Book
Binding: Hardcover

Corporate Finance | Finance | Business & Investing | Subjects | Books

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ASIN: 0470052341

Book Description

When businesses struggle they often try to make up for it by cutting costs to increase sales, but volume selling isn’t real success because you can’t do it forever. In this book, Graham Foster shares powerful business lessons on how to sell at the right price and maintain solid margins. This is the ultimate guide to keep your company growing and healthy.

Customer Reviews:

The Power of Positive Profit.......2007-06-19

This is an amazing book. It really works. My business was losing 1 million dollars a year and I was close to cloing the doors.
I applied the methods in this book and WOW my business started changing overnight. In less than 8 months I am now making a healthy profit.
Thanks to my fiend who gave me this book.
I will never look back I will be in the Black from now on

Nonlinear Pricing: Published in association with the Electric Power Research Institute

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Whoa, Einstein-dude!
Academically oriented.
Handy compendium
Nonlinear Pricing

Nonlinear Pricing: Published in association with the Electric Power Research Institute
Robert B. Wilson
Manufacturer: Oxford University Press, USA
ProductGroup: Book
Binding: Paperback

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ASIN: 0195115821

Book Description

What do phone rates, frequent flyer programs, and railroad tariffs all have in common? They are all examples of nonlinear pricing. Pricing is nonlinear when it is not strictly proportional to the quantity purchased. The Electric Power Research Institute has commissioned Robert Wilson to review the various facets of nonlinear pricing. The work starts with a general non-mathematical discussion, followed by a more technical presentation intended for readers with a fairly advanced background. Thorough and detailed, this study has ample examples of case studies from a variety of industries.

Customer Reviews:

Whoa, Einstein-dude!.......2002-10-25

This is the worst business book I have ever read. The connection between his hypothesis on pricing and his discourse on science and mathematics is lacking or at best weak. This is truly voodoo-finance at its worst.

Academically oriented........2002-01-02

Managers that have been out of school for two years will benefit more from theor own experiences.

Good text for MBAs to chew on.

Handy compendium.......2001-01-21

This is the most detailed monography on nonlinear pricing that one can get nowadays. Written by one of the most active and innovative theorist the book is filled with the masterly blend of both applications and theoretical models. Accessible to anyone who has a solid grasp on the fundamentals of microeconomic theory. It was written in the beginning of the 90s and since then significant research has been done - including the mechanism design aspect of nonlinear pricing theory. Thus a new, revised edition would be welcome both for researchers and students.

This is really the best and thorough book on the subject. The only wish I could have is the too light and concise treatment of nonlinear pricing in noncompetitive markets that are far from both extrema of monopoly and perfect competition. Nevertheless, an excellent read.

Nonlinear Pricing.......2000-05-01

This is a good book that gives an overview of how to a company can maximize its products/services by establishing a multiple pricing structure for identical products based on what customers they are targetting.

The Power of Pills: Social, Ethical and Legal Issues in Drug Development, Marketing and Pricing

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The Power of Pills: Social, Ethical and Legal Issues in Drug Development, Marketing and Pricing

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Why does one-third of the global population not have access to essential medicines? What drives new drug research priorities? How do we manage the ethical, legal and social challenges associated with improving drug access? Answering these questions and more, this book is one of the first comprehesive and critical guides to global pharmaceutical policy issues.

This multidisciplinary book covers core issues in clear, short chapters. It is a one-stop resource for students, policy makers and academics. Bringing together the insights of over thirty different specialists from around the world, this book discusses:

Book Description

Transport Pricing of Electricity Networks aims at providing a methodological and practical transmission tariff guide, to those who are involved in the electricity business as managers, engineers, lawyers, economists, regulators or policy-makers, but are not specialists in electricity transport, nor in tariff-setting for public utilities. It offers a synthesis of the recent economic research on the subject. The volume is divided into three major parts, each presenting a general aspect of transmission pricing: its legal and accounting background, its basic theory, and its implementation, successively.
How much does it cost to transmit electricity from a nuclear plant close to Lyon in France, to a car manufacturer located in Stuttgart in Germany? What price should a system operator in Canada charge a pulp and paper mill that uses the high-voltage grid for only a few weeks per year? Where in California is it more profitable to reinforce or build a new transmission line? What is the best place to locate a power gas station in England, in order to pay the lowest transmission cost? Such questions are novel and crucial for American and European liberalised electricity markets. Transport Pricing of Electricity Networks shows how the economics toolbox can be used to answer them.

Customer Reviews:

Absolutely Superb Introduction to Electricity Economics.......2006-01-27

This is the French government at its finest. A group of French academicians lucidly and brilliantly explain the philosophy, economics, quandries and implications of electricity pricing policies. Absolute "must read" for anyone in this field who does not already have PhD level understanding.

A joy to read and ponder.

Note: This is a study commissioned by the French government to guide policy making.

Retail Pricing Strategies & Market Power

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Retail Pricing Strategies & Market Power
Gordon Mills
Manufacturer: Melbourne University Publishing
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Binding: Paperback

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The Strategy and Tactics of Pricing: A Guide to Growing More Profitably (4th Edition) (Pie)

ASIN: 0522850383

Rapid Electrical Estimating and Pricing: A Handy, Quick Method of Directly Determining the Selling Prices of Electrical Construction Work

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4th edition has a problem corrected in the 5th edition

Rapid Electrical Estimating and Pricing: A Handy, Quick Method of Directly Determining the Selling Prices of Electrical Construction Work
C. Kenneth Kolstad , and Gerald V. Kohnert
Manufacturer: Mcgraw-Hill (Tx)
ProductGroup: Book
Binding: Hardcover

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ASIN: 0070355231

Book Description

Estimate jobs up to five times faster. Quickly and accurately size up any type of electrical job-faster than you ever thought possible-with this revised and updated Fifth Edition of Kenneth Kolstad and Gerald Kohnert's Rapid Electrical Estimating and Pricing. This time-saving tool offers the latest equipment and market prices, with expert information on lighting, circuit protection, grounding, feeders, branch circuits, control equipment, trasnformers, auxiliary systems, and more. Best of all, by exploiting this guide's many new features, you'll gain the competitive edge over firms still tied to time-worn techniques, including: easy-to-use charts and graphs that facilitate fast estimates; examples that show how to apply estimating and pricing data; a quick-access format, with subject following the sequence of an actual estimate; first-time coverage of new lighting fixtures; new data on findings for flexible wiring.

Customer Reviews:

4th edition has a problem corrected in the 5th edition.......2007-05-27

The 5 th Edition of this book is the final and best edition of this book. The 5 th edition corrects a problem with the consumer price index chart that was incorrect in the 4th edition. The consumer price index chart is used to update the standard prices in the book to current pricing.

This book gives pricing in a graphical format of various industrial/commercial electrical equipment installations. Even though today software ia available to do this task, by seeing costs presented in a graphical form, one can easily gage whether going the "next size up" is a big cost adder or a marginal one.

The 5th edition was published in 1993. Even though still very serviceable, it would be great if an updated edition were made available.

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