ENE474 Energy Finance
Spring 2023Autumn 2023
Following the deregulation of the electricity industry, supply and demand is to a larger extent balanced by the price mechanism. Producers as well as consumers are more exposed to market price risk. European energy markets have become more integrated across geographical areas as well as energy carriers (electricity, gas, coal). A common European framework for tradeable emission rights has been established to meet the climate challenge. The financial marketplaces, where forward contracts on energy as well as emissions are traded, provide valuable information on price and risk, and opportunities for trading and risk management.
The starting point of the seminar is the Nordic electricity market, where the important marketplaces are the Nord Pool spot market and Nasdaq OMX Commodities financial market. The objective of the course is to combine concepts from finance theory with characteristics of the energy finance markets, to improve financial as well as operative decisions in business. Examples of the former are valuation, trading, and risk management. Examples of the latter are production, transmission, and storage.
- Forward contract v. swap contract (flow)
- Forward curve modelling
- Spreads (calendar spread, spark spread, area spread)
- Forward curve dynamics
- Option valuation (European, Asian)
- Spread option valuation (spark spread option)
- Examples of possible applications:
• Flexible load contract
• Gas storage
• Power purchase agreement
• Swing contract
• Electricity generation
Knowledge - Upon completing the course students will
Have developed an understanding of an energy finance market and its instruments.
Have developed an understanding of the concept of forward curve and its dynamics.
Skills - Upon completing the course students will know how to
Use the forward curve and option pricing theory to provide insight to key aspects of relevant valuation or operational decision problems under uncertainty.
Competences - Upon completing the course students
Can apply Excel to support the analysis of relevant valuation or operational decision problems under uncertainty, using the forward curve and option pricing theory.
One-week intensive course with lectures and solution to exercises.
Basic knowledge of calculus and Excel.
Credit reduction due to overlap
Attendance is mandatory.
Written individual assignment. The students will work on the assignment for three weeks.
Pass - Fail.
Benth, F.E., S. Koekebakker, and F. Ollmar (2007): Extracting and Applying Smooth Forward Curves From Average-Based Commodity Contracts with Seasonal Variation. Journal of Derivatives, Fall 2007, pp. 52-66.
Bjerksund, P., and G. Stensland (2014): Closed Form Spread Option Valuation. Quantitative Finance, Vol. 14, No. 10, pp. 1785-1794.
Bjerksund, P., G. Stensland, and H. Rasmussen (2010): Valuation and Risk Management in the Norwegian Electricity Market. In Bjørndal, E., M. Bjørndal, P.M. Pardalos, and M. Rönnqvist (Eds.): Energy, Natural Resources and Environmental Economics. Springer, pp. 167-185.
Bjerksund, P., B. Myksvoll, and G. Stensland (2008): Exercising Flexible Load Contracts: Two Simple Strategies, Applied Stochastic Models in Business and Industry, Vol. 24, pp. 93-107.
Bjerksund, P., G. Stensland, and F. Vagstad (2011): Gas Storage Valuation: Price Modelling v. Optimization Methods. The Energy Journal, Vol. 32, No. 1, pp. 203-228.
Jaillet, P., E.I. Ronn, and S. Tompaidis (2004): Valuation of Commodity-Based Swing Options. Management Science, Vol 50, No. 7, pp. 909-921.
Johnson, B., and M.I. De Miranda (2002): Modelling Generation Assets. In Ronn, E.I. (Ed.): Real Options and Energy Management: Using Options Methodology to Enhance Capital Budgeting Decisions, Risk Books, pp. 393-427.
- ECTS Credits
- Teaching language
Autumn. Offered Autumn 2022 (last week of the semester - first time).
Part of studies
Professor Petter Bjerksund, Department of Business and Management Science