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

FCN Working Paper No. 23/2013

44 Pages Posted: 17 Jan 2015

See all articles by George Charalampous

George Charalampous

RWTH Aachen University

Reinhard Madlener

RWTH Aachen University; Norwegian University of Science and Technology (NTNU)

Date Written: December 2013

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.

Keywords: Risk management, Energy markets, Energy derivatives, Hedging strategies

JEL Classification: Q59, G11, C5

Suggested Citation

Charalampous, George and Madlener, Reinhard, Risk Management and Portfolio Optimization for Gas- and Coal-Fired Power Plants in Germany: A Multivariate GARCH Approach (December 2013). FCN Working Paper No. 23/2013, Available at SSRN: https://ssrn.com/abstract=2550250 or http://dx.doi.org/10.2139/ssrn.2550250

George Charalampous

RWTH Aachen University ( email )

Templergraben 55
52056 Aachen, 52056
Germany

Reinhard Madlener (Contact Author)

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustraße 10
Aachen, 52074
Germany
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)

HOME PAGE: http://www.eonerc.rwth-aachen.de/fcn

Norwegian University of Science and Technology (NTNU) ( email )

Høgskoleringen
Trondheim NO-7491, 7491
Norway

HOME PAGE: http://https://www.ntnu.edu/employees/reinhard.madlener

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