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MEASURING AND MANAGING MARKET RISK IN ILLIQUID SEE POWER
MARKETS
PHINERGY – JUNE 2019Stefano Fiorenzani
CONTENTS
Energy Commodities Conference 2019 PHINERGY SRLS 2
▪ Liquidity and Market structure in SEE power markets
▪ Short term and Long-term volatilities and correlations among SEE DA
and FWD prices
▪ Measuring market risk in SEE area
▪ Effectiveness of cross hedging in SEE area
WHO’S PHINERGY
Phinergy was born in 2014 from the
experience of its founders Stefano Fiorenzani
and Enrico Edoli in order to combine skills and
offer a more structured service to its
customers.
Phinergy's mission is to offer its customers
services and consultancy specializing in the
areas of energy trading and risk management
using exclusively technical skills of the highest
international level.
Phinergy has its operational headquarters in
Padua (Italy).
WHAT WE DO
Consulting services: Strategic and Process
Decisions; Business Development Support;
Portfolio Management & Market Analysis
Support.
Training: In house and open session
training courses on specialized energy risk
and trading issues.
Software Development: Decision support
tools for automatic trading; Market
analysis tools; Forecasting tools (price,
production, consumption); ETRM Solution.
PHINERGY SRLS 3EULER PRESENTATION
ABOUT PHINERGY
OUR SKILLS
Logic and Abstraction; Optimization;
Applied Mathematics, Energy Economics;
Statistics; Machine Learning; IT
Development.
WHY US?
Our excellence is based on the collaboration
and theoretical and applied experience of team
members, which derives from direct
experience in energy management, trading
and risk management.
DA & FWD/FUT MARKETS LIQUIDITY
Energy Commodities Conference 2019 PHINERGY SRLS 4
AL GR BG RO RS HR HU ME MK SI
DA ✓ ✓ ✓ ✓ ✓ ✓ ✓
IDM ✓ ✓ ✓ ✓ ✓ ✓
FUT ✓ ✓ ✓ ✓ ✓ ✓
FWD ✓ ✓ ✓ ✓ ✓ ✓
Churn Rates GR BG RO RS HR HU SI
DA 100% 15% 40% <10% 20% 45% 55%
FWD/FUT Not
Significant
Not
Significant
>200% Not
Significant
<50% <50% >200%
Source: ACER annual market monitoring report 2017.Churn rate (% on annual Load)
SPOT PRICE DYNAMICSMONTHLY & DAILY AVG DA PRICES 2018
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Daily Base AVG 2018
IT-PUN, IT-SUD, GR, HR, HU, RS, RO, BG
▪ Moving from monthly to daily price view less stable price relationships emerge (within a confirmed long term common trend).
▪ Different volatility levels, lack of short term correlation and different hourly shapes make price intersection more frequent and more generally price spread volatility higher.
Monthly Base AVG 2018
Winter Hourly Shape 2018 Summer Hourly Shape 2018
SPOT PRICE DYNAMICSDAILY AVG DA VOLATILITIES & CORRELATIONS 2018
Energy Commodities Conference 2019 PHINERGY SRLS 6
26% 27%
8%
17%
11%
9%
19%18%
0%
5%
10%
15%
20%
25%
30%
BG RO GR HU ITSUD ITPUN RS HR
S.Dev of % Daily Price Change
BG
RO
GR
HU
ITSUD
ITPUN
RS
HR
BG RO GR HU ITSUD ITPUN RS HR
Correlation Of Daily Price Change
0%-20% 20%-40% 40%-60% 60%-80% 80%-100%
BG RO GR HU ITSUD ITPUN RS HR
BG 100% 46% 26% 51% 24% 35% 46% 40%
RO 46% 100% 46% 61% 47% 49% 65% 47%
GR 26% 42% 100% 39% 48% 43% 31% 29%
HU 51% 61% 39% 100% 35% 49% 65% 77%
ITSUD 24% 47% 48% 35% 100% 80% 32% 31%
ITPUN 35% 49% 43% 49% 80% 100% 44% 44%
RS 46% 65% 31% 65% 32% 44% 100% 55%
HR 40% 47% 29% 77% 31% 44% 55% 100%
FWD PRICE DYNAMICS
Energy Commodities Conference 2019 PHINERGY SRLS 7
50
52
54
56
58
60
62
64
66
68
€/M
Wh
EEX Q319 COMPARISON
HU FIN Q319 ITA FIN Q319 RO FIN Q319
HU FIN CAL20 ITA FIN CAL20 RO FIN CAL20
HU FIN CAL20 100.0% 88.3% 29.1%
ITA FIN CAL20 88.3% 100.0% 34.5%
RO FIN CAL20 29.1% 34.5% 100.0%
Correlation of Daily Returns CAL20 Correlation of Daily Returns Q319
45
50
55
60
65
70
1/11/2018 1/12/2018 1/1/2019 1/2/2019 1/3/2019 1/4/2019
€/M
Wh
EEX CAL20 COMPARISON
HU FIN CAL20 ITA FIN CAL20 RO FIN CAL20
HU FIN Q319 ITA FIN Q319 RO FIN Q319
HU FIN Q319 100.0% 93.8% 38.0%
ITA FIN Q319 93.8% 100.0% 47.4%
RO FIN Q319 38.0% 47.4% 100.0%
MODELLING SHORT/LONG TERM VOLATILITY AND CORRELATIONS
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FWD BASED PRICE MODELLING – HJM APPROACH SPOT BASED PRICE MODELLING – Mean Reverting 2 FACTOR APPROACH
𝑑𝐹 𝑡, 𝑇
𝐹(𝑡, 𝑇)=
𝑗=1
𝑁
𝜎𝑗 𝑡, 𝑇 𝑑𝑊𝑗(𝑡)
𝐹 𝑡, 𝑇 = 𝐹 𝑡0, 𝑇 ⋅ 𝜀(𝑡, 𝑇)
𝑆(𝑡) = 𝐹 𝑡0, 𝑡 ⋅ 𝜀(𝑡, 𝑡)
𝜀 𝑡, 𝑇 = 𝑒𝑥𝑝 −1
2න𝑡0
𝑡
𝑗=1
𝑁
𝜎𝑗2 𝑠, 𝑇 𝑑𝑠 + න
𝑡0
𝑡
𝑗=1
𝑁
𝜎𝑗 𝑠, 𝑇 𝑑𝑊𝑗(𝑠)
𝑑𝑆𝑡𝑖
𝑆𝑡𝑖= 𝜗 𝜇𝑖 𝑡 − 𝑙𝑛 𝑆𝑡
𝑖 𝑑𝑡 + 𝜎1𝑖 𝑡, 𝑆𝑡𝑖 𝑑𝑊1𝑡
𝑖 + 𝜎2𝑖 𝑡, 𝑆𝑡𝑖 𝑑𝑊2𝑡
𝑖
Covariance Structure of FWD Curve Term Structure (and cross
Commodity covariance)
Cross Commodity Spot Short-Long Term Correlation
(HUPEX vs IPEX)
BOTH APPROACHES
IMPLEMENTED IN EULER ETRM
SOLUTION BY PHINERGY
FWD MARKET LIQUIDITY AND MARKET RISK ASSESSMENT
Energy Commodities Conference 2019 PHINERGY SRLS 9
Value at Risk (VaR)
Value at Risk (VaR) of a portfolio is a risk measure that allows
a statement of the type: “in the next 𝑛 days, with probability
level 𝛼, the value of the portfolio will not drop more than 𝑣(euro)”.
𝑉𝑎𝑅𝛼 𝑋 = min𝑥∈ℝ
{ℙ 𝑋 ≤ 𝑥 ≤ 1 − 𝛼 }
where X represents portfolio’s value change over the given n
days time horizon.
It is a statistical technique used to measure and quantify the
level of financial risk over a given time horizon of a portfolio
of liquid assets.
Profit at Risk (PaR)
The Profit at Risk (PaR) of a portfolio is a risk measure that
allows a statement of the type: “when maturity is reached, the
(cumulative) payoff of the portfolio will not be lower than 𝑣(euro) with probability level 𝛼.
𝑃𝑎𝑅𝛼 𝐸 = min𝑒∈ℝ
{ℙ 𝐸 ≤ 𝑒 ≤ 1 − 𝛼 }
where E represents portfolio’s earning change over the entire
portfolio’s lifetime.
It is a statistical technique used to measure and quantify the
level of financial risk of a totally “unhedgiable” portfolio of
illiquid assets held up to maturity.
FWD MARKET LIQUIDITY AND MARKET RISK ASSESSMENT
Energy Commodities Conference 2019 PHINERGY SRLS 10
▪ When a liquid FWD market is present «off-standard» injection or withdrawal profiles can be partially
hedged reducing sensibly the spot price risk.
▪ The higher is the liquidity of the FWD market the more spot price risk can be reduced.
▪ The possibility to make a hedge actually not implemented is equivalent to hold a speculative trading
position on the hedgiable profile, hence it should be measured in a similar way.
PaR Residual PaR VaR (1dd 95%)
on Hedging
Profile
Analysis done using Euler ETRM by Phinergy
X-HEDGING POWER EXPOSURE IN ILLIQUID POWER MARKETS
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▪ In some markets without liquidity on hedging products with long term maturities, cross hedging activity can be performed using correlated asset classes (other
markets power products, other commodities contracts such as Gas, Coal or EUA contracts.
▪ Here we propose an example where a 10 MW long position on CAL20 Greek power market is cross hedged with a short position on 100.000 MT Dec20 EEX EUA
contract.
▪ Hedging effectiveness is evaluated using PaR risk measure.
PaR naked power positionPaR combined power/co2
position
Analysis done using Euler ETRM by Phinergy
Hedging
effectiveness
35%
Short term and Long term
correlation GR PWR / EUA
THANKS FOR THE ATTENTION !!!
WWW.PHINERGY.BIZ
Energy Commodities Conference 2019 PHINERGY SRLS 12
PHINERGY SRLS 13
ABOUT PHINERGY
Enrico Edoli
CEO
email: [email protected]
Mobile: +39 3496354525
Web: www.phinergy.biz
Enrico Edoli is founder and CEO of Phinergy.
During his career, he worked as an external quantitative analyst for trading and risk management
support in various energy companies in Italy. He has published several technical articles and a book
related to quantitative energy finance and he is also lecturer of a course in Mathematical Finance at
the University of Padova.
Enrico has a degree in Mathematics and a PhD in Applied Mathematics achieved both at the University
of Padua.
Stefano Fiorenzani
Chairman
email: [email protected]
Mobile: +39 3481724153
Web: www.phinergy.biz
Stefano Fiorenzani is founder and Chairman of Phinergy.
He is a recognized expert in Energy Trading and Risk Management, with a career spanning numerous
top European energy companies and financial institutions. He has published several scientific
and business articles and three books on advanced methods in the Energy Finance area.
He holds a degree in Economic Science, a Master of Science in Financial Economics and a PhD
in Mathematical Finance.
Phinergy was born in June 2014 from the experience of its founders. Phinergy's mission is to offer its customers specialized services and consultancy in the areas of energy trading and risk
management, employing only the finest international technical skills. Phinergy is an innovative startup incubated by StartCube, the incubator of companies at the University of Padua.
Energy Commodities Conference 2019
CONTACTS
TELEFONO
+39 049 775129
INDIRIZZO
Via della Croce Rossa 112
35129 Padova
Energy Commodities Conference 2019 PHINERGY SRLS 14
