Shape risk

Abstract: The thesis evaluates and quantifies the residual shape risk on the Czech nat­ ural gas market. The risk stems from insufficient liquidity of forward market, when energy supplier has to hedge his short shaped sales by standard baseload products available at wholesale market. Hence, energy supplier is always left with residual position, which has to be closed at spot market. We model the residual shape risk as a difference between spot and forward prices weighted by residual position, which is derived from the shape of innogy Energie, s.r.o. household portfolio. In order to do so we develop model for a spot price dynam­ ics based on the daily index OTE. We price forward contracts as expected spot price at delivery. The spot price dynamics is modelled as a mean-reverting Ornstein-Uhlenbeck process, while assuming two different driving stochastic processes for innovations. First, we model them as a mixed jump diffusion pro­ cess. Second, we estimate control model assuming innovations to come from the normal inverse Gaussian distribution. The residual shape risk is then eval­ uated by Monte Carlo simulation of spot price paths, which we use for hedging the portfolio shape. Five percent Value-at-Risk and the Expected Shortfall measures for the jump mixed diffusion process yield costs of 0.013 and 0.016 EUR/MWh, respectively. The second assumed process yields costs of 0.011 and 0.013 EUR/MWh, respectively. Even though, the risk is relatively low it worths mentioning at highly competitive market, something what the retail energy supply business is. Further, we found the OTE index to be of lower volatility relatively to the NBP day ahead index. To our knowledge no one analysed Czech natural gas prices by this method before. Moreover, an advan­ tage of this approach is that it can be directly used for other flow commodities like electricity. JEL Classification

Abstract: This paper introduces residual shape risk as a new subclass of energy commodity risk. Residual shape risk is caused by insufficient liquidity of energy forward market when retail energy supplier has to hedge his short sales by a non-exible standard baseload product available on wholesale market. Because of this inflexibility energy supplier is left with residual unhedged position which has to be closed at spot market. The residual shape risk is defined as a difference between spot and forward prices weighted by residual unhedged position which size depends on the shape of customers' portfolio of a given retail energy supplier. For empirical evaluation of residual shape risk we use a real portfolio of a leading natural gas retail supplier in the Czech Republic over the period 2016-2017. The size of residual shape risk in our example corresponds approximately to 1 percent of profit margin of natural gas retail supplier.

Abstract: This paper introduces residual shape risk as a new subclass of energy commodity risk. Residual shape risk is caused by insufficient liquidity of energy forward market when retail energy supplier has to hedge his short sales by a non-flexible standard baseload product available on wholesale market. Because of this inflexibility energy supplier is left with residual unhedged position which has to be closed at spot market. The residual shape risk is defined as a difference between spot and forward prices weighted by residual unhedged position which size depends on the shape of customers’ portfolio of a given retail energy supplier. We evaluated residual shape risk over the years 2014 - 2018 with a real portfolio of a leading natural gas retail supplier in the Czech Republic. The size of residual shape risk in our example corresponds approximately to 1 percent of profit margin of natural gas retail supplier.