MPR Price Risk Presentation. March 27, 2008 2008 MPR Workshop. Agenda. Frame the questions Fuel Price Risk Forecasting Fixed Forward Fuel Price Portfolio Analysis (CAPM). The MPR Proxy Plant. Best estimate of market price for long-term fixed price electricity
March 27, 2008
2008 MPR Workshop
Source: Bolinger, Mark, Ryan Wiser and William Golove (2002) “Quantifying the value that Wind Power Provides as a Hedge Against Volatile Natural Gas Prices,” LBNL-50484, Figure 4.
Fundamental + Difference
(Source: Mansour, Y. The Future is Now: Power Industry Challenges in California, IEEE San Francisco Annual Banquet, October 4, 2005, Folsom: CAISO)
= Expected output at fixed price + Output deviation transacted at spot price
A portfolio analysis summarizes these risks into efficient frontiers that aid decision making under uncertainty.
Cost Variance ($Billion)
Expected Cost ($Million)
Source: Woo, C.K., I. Horowitz, B. Horii and R. Karimov (2004) “The Efficient Frontier for Spot and Forward Purchases: An Application to Electricity,” Journal of the Operational Research Society, 55, 1130-1136, Figure 1.
Source: Barbose, Galen, Ryan Wiser, Amol Phadke and Charles Goldman (2008) “Reading the Tea Leaves: How Utilities in the West are Managing Carbon Regulatory Risk in their Resource Plans,” LBNL-44E, Figure 7.
Q. What can one learn from the set of frontiers?
A. One can learn: (1) the tradeoff between cost expectation and cost risk, and (2) how the tradeoff can be affected by such factors as the utility’s load forecast and the regulator’s actions on RPS and GHG.
= (electric forward price - expected spot price)
is likely positive based on empirical evidence.
= (Natural gas futures price – expected spot price)
can be positive or negative.