Energy risk management

This chapter focuses on the challenges facing a risk manager overseeing an energy
portfolio. It sets out a general overview of the markets as they relate to risk management
and the risk quantification and control issues implicit in an energy portfolio.
The energy markets are extremely intricate, rich in multiple markets, liquidity
problems, extreme volatility issues, non-normal distributions, ‘real’ option pricing
problems, mark-to-model problems, operational difficulties and data management
nightmares. The market, to use the academic understatement, is complex and
challenging but most of all it is extremely interesting. In particular, this chapter will
focus on the challenges in the electricity market, which is by far the largest market
within energy1 and exhibits most of the problems faced by energy risk managers,
whether in power or not.