This study is oriented to the risk management in the German power market and specifically focused on examining the conventional thermal power generation. The recent energy market reforms which were taken place in Germany by subsidizing and prioritizing the electricity produced from RES eroded a significant portion of coal – fired and NG – fired power plants. The rise of RES has undermined the competitiveness of traditional power generation. This fact broke to the forefront the necessity for mitigating the risk exposure in order to confront the sluggish demand and handle this acute for the power plant owners situation.
The main principle is to assess and choose the optimum forward contract for hedging at the same time the power output and the fuel purchase. This is conducted by evaluating the hedging effectiveness of the available futures contracts retrieved from EEX. The calculation of hedging performance is based on the results of a multivariate GARCH model (BEKK model). Moreover, 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 maximum reduction of risk exposure. Finally, we proceed with a VaR estimation for both spot and futures prices in order to compare them through risk quantification. Moving up to the next section of the study, we simulate the CSS and CDS in order to forecast the price trajectories for the following month.
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