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Quantitative Financial Risk Management: Theory and Practice by Emilios Galariotis, Constantin Zopounidis

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CHAPTER 6

Risk Measures and Management in the Energy Sector

Marida BertocchiRosella GiacomettiMaria Teresa Vespucci

University of Bergamo1, Department of Management, Economics, and Quantitative Methods

INTRODUCTION

As a result of the liberalization of energy markets, energy companies got an increased understanding of the need both of profit maximization and of considering the risks connected with their activities as well as the way of hedging them; they also became aware of their own different level of risk aversion policies. In energy-sector modeling, dealing with uncertainty is a part of the problem, as well as with making decisions in different points in time. These two characteristics bring the energy sector modeling in the stochastic programming framework. The two issues of risks and decisions under uncertainty support the choice of having multistage type stochastic programs (see Ruszczynski and Shapiro, 2003; Shapiro, Dentcheva, and Ruszczynski, 2009).

In this chapter we illustrate two problems in the energy sector where the awareness of risk is fundamental, and we analyze the main advantages of introducing risk management in our models.

The first problem is related to power production and electricity trading. There is an extensive literature dealing with optimization of power production and electricity trading. See Alonso-Ayuso, di Domenica, Escudero, and Pizarro (2011), Conejo, Carrion, and Morales (2010), Fleten and Wallace (1998, 2009), Fleten and Kristoffersen (2008), ...

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