Jacques Lawarree

Risk assessment in energy trading

This paper provides a state-of-the-art summary of risk assessment in energy trading. Techniques from financial engineering are needed by electric energy companies to manage price risk. These tools are needed by suppliers, distributors, and traders in a competitive electric power marketplace. Tools that have been adapted to the specific environment of the electric power system include portfolio analysis and hedging instruments. This paper provides a comprehensive critical literature survey of what has been applied to date in the power markets and which areas continue to need additional research. One example market scenario is used throughout the paper to demonstrate the usefulness of the risk assessment methods.

Optimal electricity supply bidding by Markov decision process

The bidding decision making problem is studied from a suppliers viewpoint in a spot market environment. The decision-making problem is formulated as a Markov decision process-a discrete stochastic optimization method. All other suppliers are modeled by their bidding parameters with corresponding probabilities. A systematic method is developed to calculate transition probabilities and rewards. A simplified market clearing system is also included in the implementation. A risk-neutral decision-maker is assumed, the optimal strategy is calculated to maximize the expected reward over a planning horizon. Simulation cases are used to illustrate the proposed method.

Financial risk management in a competitive electricity market

This paper proposes solutions for electricity producers in the field of financial risk management for electric energy contract evaluation. The efficient frontier is used as a tool to identify the preferred portfolio of contracts. Each portfolio has a probability density function for the profit. For important scheduling policies, closed form solutions are found for the amount of futures contracts that correspond to the efficient frontier. Production scheduling must consider resource constraints. It is found that, without resource constraints, the portfolio with the highest expected profit can be preferred-even for a risk-averse decision-maker. When resource constraints are present, portfolios not corresponding to the maximum expected profit criteria will more frequently be preferred.

On the Optimality of Allowing Collusion

Abstract We examine a model wherein a principal can use an auditors report to contract with a privately informed manager. The auditor can be honest or dishonest, a fact unknown to the principal who must thus decide whether to allow or deter collusion. Deterring collusion is costly because the principal has to reward both dishonest and honest auditors for refusing a bribe from the manager. Allowing collusion is costly because the dishonest auditors will erode the deterrence of the punishment. We show that the principal may find it optimal to allow collusion. When the punishment is high enough, allowing collusion is always optimal. We also study how collusion is optimally managed in different environments.

Hedging with futures contracts in a deregulated electricity industry

This paper is a statistical study of direct and cross hedging strategies using futures contracts in an electricity market. A comparison of the strategies is based on the standard deviation or risk of the values of the hedging positions. Results indicate that the use of electricity futures contracts is superior to using other related futures contracts such as crude oil.

Incentives for Corruptible Auditors in the Absence of Commitment

In the absence of commitment to auditing, we study the optimal auditing contract when collusion between an agent and an auditor is possible. We show that the auditor can be totally useless if the auditors independence can be compromised with relative ease. Even very stiff sanctions on fraud will be unable to make auditing optimal. We then derive a demand for independent external auditing. We endogenize collusion cost as the cost from the risk of future detection. We also derive a justification for the focus of the recent audit reforms on penalties on CEOs in cases of audit fraud.

State-of-the-art of electricity price forecasting

Since the deregulation of the electricity power industry, many methods and techniques have been developed to forecast the electricity prices in the competitive environment. This paper classifies and compares different techniques in the literature of electricity price forecasting. The information is summarized based on the technical objectives, scope, time horizon, input data and the level of accuracy. The methods and techniques for electricity price forecasting are categorized into equilibrium analysis, simulation methods, time series, econometric methods, intelligent systems, and volatility analysis

A prisoner's dilemma model of collusion deterrence

Abstract We examine a hierarchy formed by a principal, a supervisor and an agent, wherein the supervisor and the agent can collude. We consider a case where collusion-free supervisors are not available. We demonstrate first that it is easy for the principal to deter collusion by introducing a second supervisor and designing a mechanism similar to the prisoners dilemma so that the two supervisors control each other. Since it could prove too costly for the principal to send two supervisors, a new question arises: whether it would be possible to deter collusion by sending the second supervisor with a probability less than one. We find that under reasonable assumptions on the size of rewards and punishments, the principal can prevent collusion only by ‘creating’ a new type of supervisor through sometimes informing the second supervisor of his position.

Analysis of electricity market rules and their effects on strategic behavior in a noncongestive grid

Earlier work has discussed the potential for strategic bidding in deregulated electricity markets, and shown specially how generators can take advantage of congestion in their strategy. The authors show that it is also possible for even mid-price suppliers to create congestion problems through gaming in a noncongestive system. Under auction mechanisms such as in the United Kingdom, this can be profitable, at the consumers expense. The optimal auction prevents profitable gaming, but requires the simultaneous handling of market clearing and system dispatch, making it harder to ensure the neutrality of system operations.

Catching the agent on the wrong foot: ex post choice of monitoring

Abstract In a principal-agent model with multiple performance measures, we show that the principal benefits by choosing ex post which variables will be monitored. If it is too costly for one type of agent to mimic all performance measures expected from another type, the principal can hope to catch the agent on the wrong foot if the agent tries to misrepresent his type. For cases of small asymmetry of information, the principal can implement the first best contract. For more serious asymmetries of information, the first best is not implementable. Then the low type may be required to overproduce, which is in contrast to the traditional result of second best contracting. We also obtain a ranking of monitoring instruments according to the frequency of their use.