• Shows decision-makers how they can build a rationale for hedging and trading in the new power markets in the US and Europe

• Covers breaking market issues such as the role and risks of trading power on the internet and the implications of the July 1999 power price spike

• Explains how the electricity markets work, offers market analysis, discusses hedging and trading in electricity markets and offers conclusions

CONTENTS
ExecutiveSummary

Preface

Introduction
What is price volatility?
The fundamentals of electricity: drivers of electricity demand
The fundamentals of electricity: supply and generation capacity
Joining demand and supply: the dispatch process underderegulation
What is risk management in electricity markets?

How Electricity Markets Work
Failure of futures markets to dominate
Varied menu of traded assets
Transmission services and traded power
The menu of electricity transactions
Discos and RFPs for standard offer service
The new long-term contract
Medium and short-term contracts
The instruments of electricity hedging: forwards, futures,options, weather derivatives and insurance
Futures
Exchange-traded versus OTC options markets
Over-the-counter and through the Web
Weather derivatives
Insurance
Blended instruments
Volatility issues
The results: the hours of terror, weeks of boredom
The gas crack
The markets for capacity and ancillary services
Arbitrage
Conclusion

Market Analysis
Inputs to electricity price analysis
Demand for electricity
Weather forecasting
Capacity analysis: outages, additions and constraints ongeneration and transmission
Input fuel
Oil
Natural gas
Integrating the inputs: the dispatch process
Electricity market depth, liquidity, herding behaviour and pricevolatility
The heat event of June 7-8, 1999
Herding behaviour
Are margins mean-reverting?

Hedging and Trading in Electricity Markets
Hedging instruments
Purposes of hedging electricity
Volatility reduction
Hedge gain maximisation and other extensions of risk management
Hedgemasters and portfolios
Types of hedging and trading programmes
Trading examples
Forward market strategies
Pure options strategies
Selling options
Options combinations
Hedging by condition: backwardised and contango markets
Self-insurance with finite risk instruments
Weather derivatives
Conclusions
Winners and losers
Energy consumers

Conclusions: Transition, Adaptation, Concentration
First conclusion: second decision must be better than the first
Second conclusion: cannot avoid power trading
Third conclusion: develop new energy products
And in the end 114

Notes