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Valuation and Risk Management of Power Generation

This expert training program is designed to provide participants with an in-depth understanding of the valuation and risk-management of power generation assets. The program will begin by developing participants’ understanding of the electricity and natural-gas markets, as well as how to model and forecast spot power and natgas prices.   The course will develop the basic financial (option valuation) and statistical tools required to perform the valuation and risk-management tasks. The basic result of power generation as a spread between fuel input and electricity output prices will be fully developed.  Delegates will be taught the different derivative products and learn how to apply them in the energy markets to develop hedging and risk management at both the trading-desk and corporate levels.   The liquidity tenor of available futures and option contracts is limited in its scope, and generation assets have lifetimes well beyond these.  Thus, the need to extrapolate “beyond the visible horizon” is critical, and will be presented.  The course will conclude with a brief primer on Value-at-Risk, a critical risk-management tool in power generation, as well as other commodity, assets.

Turning 'Theory' into 'Practice'?

This course is designed for the analyst, decision maker or consultant who understand the fundamentals of risk, price and cost and who are looking for new ways of coping and benefiting from market volatility and its impact on asset portfolios.  The course is critical for any economic agent wishing to value a power plant and/or optimize its risk management.  In light of real-world transaction costs, frictions and taxes, the goal for power companies should not be to avoid uncertainty but to strive for the highest possible return-to-risk ratio.

Who should attend?

This course is designed for individuals working in financial analysis, valuation, trading, marketing, risk management or quantitative analysis positions with power generation companies; investment and commercial banking, consulting, and financial services firms working in the generation sector; energy trading firms; and corporations outside the power industry with a significant cost exposure to electricity prices, such as energy-intensive manufacturing industries.   - Financial analysts, esp. those employed at power-utility cos. - Quantitative analysts or researchers, esp. those dealing with power and/or natgas commodities - Energy traders dealing with commodities - Risk Managers dealing with commodities - Commercial and investment bankers dealing with commodities - Consultants in the commodity arena- Government and regulatory officials, esp. those regulating the power industry

Key areas to be covered in the programme and documentation

Session 1:  The Current State of the Commodity Markets


·        Measuring Nervousness/Uncertainty of Equity and Commodity Markets

·        Global NatGas Markets

·        The Global Coal Markets

·        Power Prices



Session 2:  Forward/futures and Swaps


·          Forward/futures markets

·          Swap Markets

·          Relationship of Futures and Swap Prices


Session 3:  Basic Option Valuation Techniques


·          Binomial Model

·          Black-Scholes and Black (1976) Formulas

·          Option “Sensitivities” (the “Greeks”); Delta, Gamma and Vega

·          Valuation of European- and American-style options in energy markets



Session 4:  Basic Statistical Tools – Volatility and Correlation


·          Volatility Estimation under Alternate Stochastic Processes

·          Recognizing the volatility skew

  • Historical Volatility; The Term Structure of Volatility (TSOV)
  • Estimating Volatility from Call Options in Energy Markets
  • Historical or Implied Vols?
  • Characterizing the Volatility “Surface” Across Time and Strike

·          Estimating Coefficients of Correlation



Session 5:  Energy Assets as Real Options -- Power Plants as Spread Options


·          Valuation of Spread Options and their Application to Power Plant Valuation

·          Alternatively valuing a power plant as a strip of monthly and daily options

·          Hedging the Value of Power Plants

o         Understanding the Hedge Ratios Implied in Power Plant Valuation

o         How, and Whether, to Monetize the Value of a Power Plant by Hedging

·          Extending the Spread-Option Model to Account for:

o         O&M Fixed Costs

o         Dual-Fuel Capability Options

·        Start-up and Cool-down periods

Session 6:  Energy Risk Management at the Corporate Level


·          The Trade-off between Risk and Return in Energy Risk Management

·          Measuring Price- and Quantity-Risk Exposure at the Corporate Level

·          Hedging Corporate-Level Price- and Quantity-Risks using Linear (Futures/Swaps) and Non-linear (Option) Instruments

·          Using Mean-Variance Optimization to Design an Optimal Energy Risk Program

  • Presenting the Trade-offs of an Optimal Corporate Risk Strategy to Decision-makers
  • Using the Richness of Energy Markets' Derivative Structures:  Average-Style Options


Session 7:  Extrapolating in Energy Markets


·           Extrapolating Forward/Futures Prices


o                    Extrapolating Electricity Prices

o                    Extrapolating Natural-Gas Prices

·          Extrapolating the Term Structure of Volatilities (TSOV)

o                    The Empirical Regularities

o                    Extrapolating Volatilities:  A Mechanical Approach

o                    Extrapolating Volatilities:  A Modeling Approach

·          Extrapolating Correlations

o                    Modeling Correlations with/without Seasonalities

     Modeling Approach to Extrapolating Correlations


Session 8:  Value-at-Risk in the Power Industry


  • Overview of VAR
  • “Basic Principles” of Value at Risk
  • Computation of Analytical VAR
  • Proper Accounting for the Asymmetry of Long/Short Option Positions
  • Computing Power Plant Value-at-Risk on Stand-Alone Basis and in Conjunction with Portfolio of Financial Instruments
  • The “Expandability” of Analytical VAR to Volumetric Risk

Benefits to you

  • Use financial models to analyze and forecast electricity and fuel prices; extrapolate forward prices beyond the liquidity tenor
  • Manage and optimize their corporations’ power risk exposure
  • Estimate and calculate volatility in electricity and fuel prices
  • Apply option valuation techniques to the power markets
  • Understand and use derivative products to mitigate energy price risk; use structured products to enhance firm value; understand exotic structures unique to gas and power (e.g., swing options, weather derivatives)
  • Utilize real options theory to value energy assets; use information from futures/option prices to make optimal power production decisions: Value power plants
  • Apply Value-at-Risk to the power industry

Companies already benefiting include:

Duration of Course

2 Day Course

Course details

For more information about this course and upcoming course dates, please contact Emily Jones at or call 312.540.3000 ext 6714

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Further information

UK Enquiries: +44 (0) 203 002 3057

Non-UK Enquiries: +420 (0)2 5570 7246

North American Enquiries: +1 312 540 3000 X6714 or


"This course will allow my company to develop its existing strategies to a much greater and hopefully profitable level."

Managing Director, Tarmac