Credit risk can be defined in a number of ways, but will consist of the following:
Ω Unpaid bills (current and aged debt)
Ω Delivered but unbilled (realized)
Ω Replacement cost of future commitments (unrealized) – mark to market exposure
Ω Potential adverse movements or replacement costs – CVaR (Credit Value-at-Risk)
and potential exposure (maximum exposure given potential movements in prices
and volatilities over the life of the contract)
The volatility of energy prices, particularly power, makes the challenge of managing
credit risk particularly interesting as exposure is potentially unlimited.
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