• Illustrates the many options and tools available to assist you with the decision-making process at each stage of the supply chain whilst alerting you to the various new risks formed by increased market uncertainty

• Provides you with all the necessary tools to easily apply the featured methodologies in your own work

• The title's emphasis on the application of theory to practical situations makes it highly relevant to both practitioners, who apply the theory to practice, and academics who study the effectiveness of the applications

• Features comprehensive and accessible coverage of: fuel trading, renewables and intermittent energy sources, forecasting and other analytical tools, transmission, retail power contracts, exotic options and flexibility, and regulation and deregulation risks

Uncertainty, Risk and Flexibility: Introduction and Overview
Anne Ku

Physical processes redefined by risk and flexibility
Decision makers redefined
Contracts
Impact of deregulation

1. Fuel: Trading and Procurement
Pushkar Wagle

Cross-commodity trading
Oil
Natural gas
Coal
Nuclear

2. Renewables and intermittent Generation
Andrew Miller

Hydro
Renewables

3. Analysing Risk and Return in the Physical Energy Portfolio: A Non-Technical Overview
Jim Christian

Overview
Asset valuation (real options)
Asset optimisation
Portfolio optimisation

4. What's Driving the Demand for Forecasting?
Fereidoon P. Sioshansi

Prices: forecasting vs forward curves
Supply forecasting
Demand forecasting
Simulation, scenario analysis

5. Transmission, Transmission Services and Non-Energy Markets
Andrew Miller

Transmission pricing
Basis hedge
Delivery risk

6. Fundamentals of Retail Transactions
Lance Hinrichs

Deal structuring
Risks
Decision making

7. Exotic Options
Alexander Eydeland and Krzysztof Wolyniec

Options defined
Determinants or attributes of exoticity

8. Simulation for Organisational Learning in Competitive Electricity Markets
Isaac Dyner , Erik Larsen, Alessandro Lomi

System dynamics as a modelling tool
Timing risk

Reviewed by Cheryl Morgan, Chief Executive, MorganEnergy - www.morganenergy.com

If there is one thing that is characteristic of electricity markets these days it is an awareness of risk. This is not to say that risk did not exist in old-style monopoly utilities. No one can see the future, so the outcome of business decision-making is never certain. However, in the monopoly utility world it is almost certain that responsibility for bearing the costs of any risk-taking lies firmly with the consumer. If things go wrong with its business the utility simply puts up its rates to cover the shortfall. In a competitive environment that option is no longer easily available, and electricity businesses can rise and fall on the strength of the business decisions that they take. Some spectacular bankruptcies, mainly in the USA, have shown just how fatal taking the wrong decisions can be. A guide to the electricity industry that is focused on risk rather than on processes and technologies is therefore an urgent need.

Into this market niche steps Anne Ku with a compilation of essays entitled, Risk and Flexibility in Electricity: Introduction to the Fundamentals and Techniques . Appropriately the volume is published by Risk Books . The contributors to the volume are each experts in their own particular section of the industry, and the idea is to present a comprehensive guide to all facets of the industry from purchasing fuel down to selling to the end user.

A book like this is potentially fraught with danger from a variety of sources. Contributor writing styles may vary considerably, and important parts of the story may be repeated endlessly from different viewpoints or fall between chapters. For the most part Ku has avoided these traps. Her contributors are all competent writers and if there is one topic that they keep returning to then it is the question of optionality, which is obviously central to the whole debate. I would have liked to see a general discussion of energy market structures to go alongside the coverage of balancing markets, capacity markets and ancillary services, but you can't have everything and the book certainly covers a lot of bases.

Ku kicks off with an introduction that attempts to set the scene with a discussion of terminology. This is a difficult undertaking because the same terms can mean slightly different things in different markets around the world, and because jargon usage within the industry may significantly diverge from dictionary meanings of words. I have a particular concern about the word ″deregulation″ as many people, for example our friends at the Cato Institute , take this to mean that the purpose of market reform is to remove all regulation from the industry. Even the Germans have come to realize that this is foolish. However, the term is now common currency and all we can do is try to explain to people what it means in context as opposed to what it appears to mean in isolation.

The meat of the book is a series of chapters covering topics as diverse as fuel procurement, renewable generation, transmission services and retail contracting. This provides an excellent mix and makes the book well worth reading even for people who have been in the industry for a while. It is all too easy to become balkanised in your own little sector of the industry and therefore not understand the problems faced by your colleagues down the hall. How many trading evangelists, for example, realize that coal is not a uniform product and that fuel sourced from one mine may be quite unsuitable for a power station designed to run on the output from another?

My favourite chapter is the one on risk and return in physical energy portfolios by Jim Christian of the software company, EnWorkz . Anyone who has section headings such as ″ Electricity is not corn ″ and ″ 'Asset-backed' does not mean 'low risk' ″ clearly has a good grasp of the various myths and superstitions that abound in the electricity industry. Christian also manages to explain a whole raft of complex issues without resorting to equations or quant-speak, which is an impressive achievement.

The place where you might expect to find maths is the chapter by Alexander Eydeland and Krzysztof Wolyneic , given that they have written the most up-to-date book on energy derivative valuation. However, what they actually do is provide a useful taxonomy of various types of exotic option, most importantly with a number of examples as to how each instrument might be used in actual energy risk management.

From a market design point of view the most interesting chapter is Andrew Miller 's section on transmission, which covers a range of issues from the debate between nodal and zonal pricing to transmission losses, transmission rights contracts, ancillary services and capacity markets. Miller is the only person with two chapters in the book. He has a long career with major UK companies such as National Power and National Grid , but is now a director of the Renewable Energy Company and therefore well placed to provide an overview of the different types of renewable generation and their respective risks.

I'll pass on commenting on the section on forecasting because its author, Perry Sioshansi , is a long-time friend and colleague. Suffice it to say that the chapter is well informed by Perry's long experience at companies such as Southern California Edison , EPRI , NERA and Henwood .

The book ends with its most academic chapter, a fascinating look at the use of System Dynamics models for modelling strategic decision-making in electricity markets. Put simply, a System Dynamics model is a computerised business game that allows users to test out the effects of strategies. The ″game world″ can be anything from capacity planning to day-to-day trading. One of the leaders in this field is Professor Derek Bunn of the London Business School , and I was interested to learn that Bunn has a model that apparently shows cycles of boom and bust in capacity to be inevitable in electricity markets. One of the co-authors of the chapter, Erik Larsen , worked with Bunn on developing this model.

Overall Ku's book provides a useful introduction to a wide range of different aspects of the electricity industry. Don't expect in-depth treatment of the subject matter - each of the chapters could probably be expanded to from a book in its own right. But as an overview of an increasingly complex and risk-filled industry it provides an excellent starting point to understanding a wide range of difficult issues.

Reviewed by Chris Papousek, Managing Director, The New York Mercantile Exchange, Inc.

The complex power beast is finally tamed in this comprehensive, well arranged volume. Each chapter is broken down into easily digestible components combining thoughtful insight with objective analysis, suitable for novices and energy veterans alike. This book is a must-read for decision makers involved in any link in the electricity value chain.

Reviewed by Dr. Jörg Spicker, Vorstand/Member of the Board, Atel Energie AG

Books dealing with the basic economics used to design power markets are rare. Anne Ku's newest opus is therefore a welcome addition. Readers will find an up to date introduction to this important field, covering a wide range of topics, from engineering through trading to political issues. Renewable energy is certainly ever growing in importance, while power generation is no longer regarded as being ″just available″ since recent black outs in the USA and Europe. Price volatility developments show that power markets are far from being in from a mature state. Anne Ku's book is very well suited to bring readers up to speed quickly and easily.

Daniel E. White, Executive Vice President, Pace Global Energy Services

Provides a sound foundation in both the basic and complex aspects of finding and capturing opportunities while managing risk in the volatile business of electricity trading and marketing.

Aram G. Sogomonian, Constellation Power Source, VP Risk Management

This book has done a good job of collecting a useful array of related topics important to the merchant energy business.

Ron Levi, Managing Director, GFI Group

A must read for all involved in the electricity markets. This book will be useful for both novices and professionals who want a deeper understanding of the pricing techniques involved in minimizing risk in the electricity markets. Well done Anne.

Reviewed by Oliver Yu, Ph.D.,President, The STARS Group

In the last decade, the electric power industries in most parts of the world have been undergoing major structural changes. In general, they are moving from government-owned or regulated regional monopolies to independent generating and sales organizations competing in the open market. These changes have brought significant uncertainties, risks, as well as confusion to both the electricity providers and end-users.

Dr. Anne Ku, an experienced energy researcher and journalist, has compiled a timely book on the risk and flexibility in the electricity industry. Although Dr. Ku was modest in stating that the book aims at comprehensibility rather than comprehensiveness, it actually has addressed all major elements of the value chain of electricity: from fuel, generation, forecasting, delivery, to supplying the end-users.

All chapters of the book are authored by highly qualified technical professionals and collectively they provide a wealth of clear concepts, useful knowledge, and practical techniques for analyzing and managing risk as well as developing and utilizing flexibility in the changing electricity industry. Chapters 1, 3, and 8, addressing respectively fuel procurement, portfolio risk, and system simulation, are especially readable and insightful.

All in all, Dr. Ku has done a superb work in providing an excellent primer on the fundamental concepts and techniques for understanding and managing risk and flexibility in electricity. The only suggestion this reviewer may offer would be adding some clarification and discussion in the Introduction and Overview chapter in the following two areas.

First, uncertainty primarily reflects the decision-maker's ignorance about reality. The decision-maker may or may not realize the existence of such ignorance. In other words, there are things that we know we do not know, and there are things that we do not even know that we do not know. In this context, Bernstein's interpretation of uncertainty as ″unknown probabilities″ is only a subset. Furthermore, such ignorance and its resulting uncertainty had always existed prior to the recent changes in the electricity industry. For example, in the United States, practically no one had predicted the long lasting impact of the 1973 oil embargo on electricity demand growth, which went from an average annual growth rate of about 7% prior to 1970 to that of about 3% after the embargo, inspite of full economic recovery and the return to normalcy in the business environment. Now, with market competition, the decision-maker's ignorance will include not only economic and weather factors, but also the interactive strategies of competition. With such dynamic interaction coupled with the intrinsic complexity of the power system, even the regulatory policy planners who design the changes cannot foresee the ultimate course of change in the industry, as evidenced by the disastrous experience of California a few years ago. As a result, with these changes, the level of uncertainty in the electricity industry has increased by one or two orders of magnitude.

Second, although uncertainty has always existed in the electricity industry, the risk burden has shifted in the current changing process. Specifically, when the industry was a regulated monopoly, the electric utility was assured a reasonable return of investment, and the financial risk of energy price fluctuation and economic upheaval was largely borne by the end-users, through cost passing-throughs and price adjustments. In exchange, the end-users were assured a high level of supply reliability. With open competition in the market, the energy providers and suppliers will now bear most of the financial risks, while the end-users faces the risk of not only electricity price volatility but also supply unreliability. Thus, both suppliers and end-users now need to manage risk.

Again, I wish to congratulate Dr. Ku for a great service to both the learned professionals and intelligent laymen in enhancing their ability to effectively study and manage the risk and flexibility in the continually evolving electricity industry.

Reviewed by Soli Forouzan, CFA - President of Mind Span, Inc., a Houston based energy risk management consultancy he founded four years ago

″Is there something I can read on this?″ I have been asked this question many times by colleagues or clients. The bulk of my trading experience, consulting practice, and seminar instruction, revolve around asset flexibility (optionality) and the resulting risk management issues. And I frequently get asked for books on this topic or the fundamentals of the business. Risk and Flexibility in Electricity easily and successfully satisfies both requirements.

On a subject very close to my heart, I found Chapter three ″Analyzing Risk&Return in the Physical Portfolio: A Non-Technical Overview″ an excellent primer on embedded optionality of energy assets. The author successfully describes operating or contractual constraints of energy assets, and their embedded optionality or flexibility, as two sides of the same coin. The pitfalls of overly simplified methods of managing asset flexibility (which might have led to many recent bankruptcies) are also well represented in this chapter. For example, the author provides a good explanation of why it is grossly inaccurate to value generating assets based on ″average″ forward prices for fuel and power, and shows the value of using forward price volatility, via simulation analysis, to capture the flexibility value of such assets. The pros and cons of various methodologies, including simulation models, are well thought through and explained here. Topping off this section is a short but useful glossary of terms at the end of the chapter.

Anne Ku deserves credit for an excellent editing job, choosing relevant subjects and finding complementary topics. A good example of the latter is how the chapter on exotic options builds on the above discussion on asset flexibility by getting into the more advanced mathematical solutions.

The remaining chapters are well written and illustrated with plenty of up-to-date examples. They should be of great help to anyone trying to gain a fundamental understanding of a very complex industry.

Reviewed by Marco A. G. Dias, Petrobras, Petróleo Brasileiro S.A.

Electricity markets present many risks and opportunities to investors, mainly after the deregulation that took place in the last ten years in many countries. Flexibility can reduce risk and increase value by adjusting the optimal action to the changing market conditions.

This new book comprises the editor's introductory article, 8 papers plus a subject index covering all papers. All papers are practical and very accessible with few equations, so that undergraduate students and professionals can take advantage of this welcome addiction to electricity economics bookshelf. MBA and graduate students also will learn with the diversity of topics covered by the book and they will know valuable details from the electricity markets. The book covers all electricity industry process: generation, transmission and distribution/retailing. Among the topics analysed I highlight renewable generation, energy portfolio, exotic options, deregulation, contracts, and even organizational learning.

The subject index is a rare issue in this kind of book (papers collection) but very important for the readers interested in specific topics. Thanks Anne, for the good edition!

Reviewed by Lynn Brewer, Author: ″Confessions of an Enron Executive: A Whistleblower's Story″, President - The Integrity Institute

As a former Enron executive who traded electricity, I quickly realized the attempts made by a handful of traders to manipulate the markets. It is my belief that had those engaged in power marketing activity with Enron read Risk and Flexibility in Electricity, edited by Anne Ku, the damage to the marketplace would have been minimized.

Unfortunately, a few at Enron were able to capitalize on the lack of knowledge of most in the early stages of deregulation. And today, many former Enron traders are under investigation and utility managers have lost their jobs because they simply did not understand the complexities of risk management and were all too willing to simply engage in practices that were unsound.

Risk and Flexibility in Electricity should be required reading for anyone engaged in the electricity markets. This book is very easy to read and understand the otherwise difficult concepts of the electricity markets - even for those with little or no experience in the electricity markets.

While we are uncertain how the electricity markets will stabilize themselves in a post-Enron world, my hope is that we would use this book as the gold standard for understanding and operating in the deregulated electricity markets.

Anne Ku works as a writer, covering energy topics as an independent critic. Previously, she has been the editor of Platt's Global Energy Business and Energy IT (bi-monthly magazines covering the areas of energy trading, risk management and technology) and has worked for the Union Bank of Switzerland and several management consulting firms in London and Singapore. Anne wrote her doctoral thesis on modelling uncertainty in the electricity industry and tested her hypothesis of 'flexibility as a means to cope with uncertainty' by working for Enron in Houston and London in electricity and natural gas research and modelling. Anne holds a PhD in decision sciences from London Business School (1995), a Bachelor's degree in electrical engineering from Duke University and a Master's in operational research from London School of Economics.