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About the course

Understand price forecasts & assess risk in the electricity industry

A four day intensive, technical hands-on course in which attendees receive comprehensive instruction on the theory and practice of making price forecasts and assessing risk in the electricity generating industry.

Forward pricing and valuation in electricity generation is a four day intensive, technical hands-on course in which attendees receive comprehensive instruction on the theory and practice of making price forecasts and assessing risk in the electricity generating industry. After discussion of electricity markets around the world, the course moves to programming and model structuring, where attendees follow the lead of the instructor in building various analyzes of forward pricing and valuation issues. Exercises include analysis of supply and demand, modeling of capacity mix and capacity level optimization; construction of time series analysis for fuel prices loads and hydro generation; and, project finance analysis of merchant plant investments. As the course progresses, attendees apply risk assessment, option pricing, and valuation techniques in real world cases using an integrated model. In addition to building their own models, participants learn how to use fully developed models that incorporate sophisticated debt structuring, break-even analysis, contract pricing, time series equations and Monte Carlo simulation.

The course will cover:

  • Learn practical tools to analyse a host of issues in electricity analysis including efficient tools to work with supply and demand data; creating flexible scenario and sensitivity analysis to evaluate power prices and marginal costs; effectively presenting short-term and long-term supply and curves; development of hydro analysis; Monte Carlo simulation and other issues.
  • Create demand and supply models of electricity pricing that incorporates changes in fuel prices, new capacity, demand profiles, maintenance outages to measure hourly marginal cost and total generation cost.
  • Study the structure of market designs around the world and simulate pricing strategies through evaluation of the California crisis and simulation exercises.
  • Understand the relationship between capacity pricing, reliability, loss of load probability and reserve margins through extending the short-run supply and demand analysis and modelling outage cost with different capacity configurations.
  • Model the economic value of different types of renewable resources in alternative markets including storage hydro, run-of-river hydro, wind and solar.
  • Develop efficient ways to quickly compute the levelised electricity cost of different technologies using carrying charge factors and alternative financial models and use levelised cost analysis to develop screening models of optimal resources.
  • Evaluate long-run marginal cost of electricity cost through simulating the value of different generating resources given load curves and simulate the effects of different capital costs, heat rates and fuel prices on the long-run marginal cost.
  • Compute the effects of start-up costs, heat rate curves, and transmission constraints on the value of alternative plants and the price of electricity.


Day 1

Electricity Price Characteristics and Short-term Marginal Cost

Analysis of electricity price and load data in different markets around the world

  • Comparison of different markets
  • Analysis and summary of load data
  • Working with electricity price data
  • Sources for electricity price data
  • Presentation of electricity price and load data for different time periods

Computation of plant value per kW in de-regulated markets

  • Value per kW for hydro plant – run of river and storage with constrained energy
  • Value per kW for coal plant through matching coal prices and heat rates with electricity price
  • Value per kW for gas plant through matching gas prices and heat rates with electricity prices
  • Value per kW for renewable energy

Short-term marginal cost of electricity

  • Discussion of marginal cost principles
  • Definition of marginal cost
  • Short-run versus long-run cost
  • Reconciliation of short-run marginal cost, long-run marginal cost and market prices
  • California power crisis case study
  • Review of supply and demand drivers
  • Evaluation of market power
  • Bidding game

Modelling of short-run energy cost

  • Creation of supply curve from cost
  • Creation of supply curve from bids
  • Source of supply curve data
  • Presentation of supply curve
  • Demand curve with price elasticity
  • Intersection of supply and demand
  • Computation and presentation of short-run marginal cost for hour, day, week and multiple years
  • Computation of energy generation cost for different time periods with different capacity expansion options

Incorporation of renewable energy and hydro in short-run marginal cost

  • Adjustment of demand curve versus supply curve
  • Run of river hydro
  • Solar and time of day
  • Wind and seasonal
  • Storage hydro with load duration curve

Day 2

Continued Short-term Marginal Cost and Long-run Marginal Cost

Modelling uncertainty in short-term cost marginal cost

  • Uncertainty and volatility in demand – working with demand curves
  • Uncertainty and volatility in fuel cost
  • Uncertainty in plant outages
  • Uncertainty in hydro generation
  • Effects of uncertainty with different reserve margins

Long-run marginal cost and capacity prices

  • Theory of long-run marginal cost
  • Problem of short-run marginal cost and return on capital
  • Measurement of long-run marginal costs using peaker method
  • Long-run marginal cost and levelised cost of alternative technologies
  • Long-run marginal cost and the cost of interruptible rate
  • Long-run marginal cost and the cost of customer outage

Discussion of alternative capacity cost frameworks

  • Price spikes and no price caps
  • Administrative capacity uplifts and energy cost pricing
  • Capacity price bidding
  • Pros and cons of alternative models
  • Effects of alternative models on energy prices and addition of new capacity

Computation of levelised cost for alternative technologies

  • Introduction to capacity cost database
  • Importance of cost of capital in technology cost
  • Regional differences in cost of electricity

Carrying charge rates - traditional

  • Theory of carrying charge rates
  • Computation of carrying charges using traditional utility approach
  • Calculation of levelised carrying charges with different tax, cost of capital and capital structure assumptions
  • Incorporation of inflation in carrying charges
  • Analysis of levelised cost of electricity with different carrying charges

Day 3

Continued Long-term Marginal Cost and Equilibrium Pricing

Computation of carrying charges using project finance modelling

  • Basic structure of project finance model
  • Required IRR, debt financing and other assumptions for simple project finance model
  • Building a basic project finance model with flexible construction periods, plant lives, tax depreciation methods and return assumptions
  • Use of project finance model to compute carrying charges
  • Contrast use of project finance model and traditional model in deriving levelised cost of electricity

Case study of supply and demand – U.K. market crash

  • Sutton bridge discussion
  • Changes in market structure
  • AES Drax capital structure
  • AES Drax financial analysis

Equilibrium long-run price of electricity

  • Theory and importance of computing long-run cost
  • Relationship of price and cost in long-run
  • Marginal cost with multiple efficient technologies
  • Theory of capital recovery per kW

Screening analysis

  • Creating model of capital cost, operating cost and capacity factor
  • Computing optimal capacity factor for different fuel/capacity cost trade-offs
  • Optimal capacity factor for different units
  • Capacity factor versus time on the margin

Integrated marginal cost model for evaluating long-term prices

  • General structure – combining short-run cost models with value per kW
  • Setting-up model with different capital costs, fuel costs and supply mix
  • Computation of energy value per KW and capacity value per KW for each unit
  • Simulation of clearing energy price with multiple units
  • Computation of optimal supply mix and resulting combined energy and capacity price

Power contracts and independent power production

  • Risk allocation and computation of penalties in PPA contracts from marginal cost analysis
  • Value of PPA from long-run marginal cost analysis
  • Value of availability provisions from LOLP and outage cost analysis
  • Trade-off between risk, O&M costs and availability
  • Value of heat rate and efficiency in markets with different fuel prices from marginal cost analysis
  • Value of capacity in different seasons from short-run marginal cost simulation

Start-up costs, heat rate curves and minimum capacity in supply curve

  • Discussion of heat rate curves
  • Equations for incremental and average heat rate curves
  • Incorporation of heat rate curves and fleet of generation
  • Day ahead scheduling and real-time dispatch
  • Volatility of day-ahead prices and real-time prices

Course summary and close

Trust the experts

Ed Bodmer

Ed has created innovative forward pricing, productivity measurement and investment valuation software for consulting clients throughout the United States. He has taught energy economics and finance throughout the world, and formulated significant government policy and corporate strategy in the U....


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