A 4 day comprehensive training course designed to provide you with an understanding of the following:
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Different valuation techniques
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Qualitative factors affecting valuations
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Quantitative factors affecting valuations
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How to apply the appropriate valuation technique(s), including financial modelling using Excel
Forward Pricing Risk Management in Electricity Generation Course Background
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 analyses of forward pricing and valuation issues.
Exercises include analysis of supply and demand, modelling of capacity mix and capacity level optimisation; 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.
Day 1
Electricity Price Characteristics and Short-term Marginal Cost
Review of Electricity Prices in Different Markets Around the World
a. Comparison of different markets
– Working with electricity price data
– Sources for electricity price data
– Presentation of electricity price data
b. Statistical Characteristics of Prices
– Volatility in different time periods – hourly, daily, monthly, annual
– Mean reversion of electricity prices
– Price boundaries on electricity prices
– Comparison of electricity prices to stock prices, interest rates and other commodities
c. California Power Crisis Case Study
– Review of supply and demand drivers
– Evaluation of market power
– Bidding game
d. Simulation Model of Electricity Using Time Series
– Theory of time series modelling and applicability to electricity
– Model with volatility
– Model with volatility and mean reversion
– Including equilibrium prices in model
Marginal Cost of Electricity
a. Lecture on Principles of Marginal Cost
– Definition of marginal cost
– Short-run versus long-run cost
– Reconciliation of short-run marginal cost, long-run marginal cost and market prices
b. 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
– Intersection of supply and demand
– Computation and presentation of short-run marginal cost
c. 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
d. 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
Day 2
Continued Short-term Marginal Cost and Long-run Marginal Cost
e. 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
f. 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
g. Transmission constraints and energy prices
– Theory of transmission constraints and prices
– Transmission constraints in electricity versus transmission in oil, gas, food and other products
– Modelling of region by region supply and demand
– Modelling transfers of capacity with alternative transmission constraints
– Computing the value of transmission
– Policy issues associated with addition of transmission capacity
– Case study of transmission capacity in Maine and Canada
Long-run marginal cost and capacity prices
a. 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 levelized cost of alternative technologies
– Long-run marginal cost and the cost of interruptible rate
– Long-run marginal cost and the cost of customer outage
b. 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
c. Customer outage cost and loss of load probability
– Incorporation of demand response and demand elasticity into short-run marginal cost model
– Calculation and analysis of loss of load probability
– Computation of reserve margin through equating loss of load criteria with capital cost of peaker.
d. Computation of levelized cost for alternative technologies
– Introduction to capacity cost database
– Importance of cost of capital in technology cost
– Regional differences in cost of electricity
e. Carrying charge rates - traditional
– Theory of carrying charge rates
– Computation of carrying charges using traditional utility approach
– Calculation of levelized carrying charges with different tax, cost of capital and capital structure assumptions
– Incorporation of inflation in carrying charges
– Analysis of levelized cost of electricity with different carrying charges
Day 3
Continued Long-term Marginal Cost and Equilibrium Pricing
f. 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 levelized cost of electricity.
Equilibrium long-run price of electricity
a. 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
b. Computation of Value per kW
– 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
c. Screening Analysis
– Creating model of capital cost, operating cost and capacity factor
– Computing optimal capacity factor for different fuel/capacity cost tradeoffs
– Optimal capacity factor for different units
– Capacity factor versus time on the margin
d. 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.
Day 4
Power Contracts and IPP’s
Power Contracts and Independent Power Production
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Ed Bodmer
Edward Bodmer 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.S.
Mr. Bodmer's consulting clients include investment banks, commercial banks, research institutions and government agencies on a wide variety of complex valuation and advisory matters. He has constructed a unique framework for electricity price forecasting and valuation using production cost modelling techniques combined with option price theory and Monte Carlo simulation.
Mr. Bodmer is also an adjunct professor at leading University where he teaches courses in microeconomics. Along with his practical experience that covers a multitude of major advisory projects, he has taught specialised courses in financial modelling, electricity pricing, option valuation, mergers and acquisitions and contracting to investment banks, commercial banks, industrial corporations and electric utility companies.
Mr. Bodmer was formerly Vice President at the First National Bank of Chicago where he directed analysis of energy loans and also created financial modelling techniques used in advisory projects. He has used the models in providing expert testimony on subjects ranging from capital structure to investments in multi-billion dollar nuclear plants to complex valuation of new investments.
Mr. Bodmer received an MBA degree specialising in econometrics (with honours) from the University of Chicago and a BS degree in finance from the University of Illinois (with highest university honours). He has written many articles and is in the process of completing a textbook on valuation of electricity assets.
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