WorldPower 2009 Contents

Foreword: Guy Isherwood, Editor, WorldPower

Introduction: Peter Reitz, Eurex Frankfurt AG

Generation: Global Statistics

Section 1: Power Dynamics

Global Power Markets

By Guy Isherwood, Editor, WorldPower

Global Energy Map

WorldPower

The Bumpy Ride to Copenhagen

By Bertrand Magné, International Energy Agency

The countdown to Copenhagen continues. Governments across the world are preparing their negotiating positions for December's UN Climate Change Conference in Copenhagen this December, where - all being well - major steps will be taken to put the world on a different, more sustainable emissions trajectory.

European Power: Major investments required, with gas & renewables expected to dominate.

By Bruno Brunetti, PIRA Energy Group

The unfolding of the severe economic recession is taking a silent, but significant toll on European electricity markets through plummeting loads from industrial shut-downs. However, a greater issue is to what extent the more difficult access to the credit markets and the sharp drop in fossil fuel needs will affect companies' capabilities to modernise or build new units - especially since costs of new plants or components have remained particularly strong.

Optimising Power Trading

By Dr. Albert Jürgen Enders & Mario Michael Schultz; Deutsche Börse AG- Market Data & Analytics

The development and growth of financial markets has gone hand in hand with the need for ever improved news and data related services. Speed and provision of reliable real-time market data and analytics have turned into a key success factor for traders and other market participants. In addition, information and analysis products contribute decisively to more transparency in the financial markets and make them more decipherable. The same applies to commodity markets, where the need for sophisticated and up-to-date data has grown with the sophistication of the market itself. A good example is the deregulation and development of power markets over the last 10-15 years, with ever more complex fundamental factors influencing markets and prices. The challenge is to master the information for better forecasting and trading performance.

Surviving the 'Crash & Burn' Economy

By Stephen Stolze, Enterprise Management Solutions

A global recession is upon us. Equity values of financial institutions have evaporated rapidly; credit availability is highly constrained and expensive when it can be obtained. These prevailing economic conditions have had a profound effect on all markets, and sectors within markets, resulting in reduced GDP, markedly higher unemployment, and a corresponding reduction in energy demand.

Section 2: Trading & Risk Management

Trading & Risk Management in Power Markets

By, Guy Isherwood, Editor, WorldPower

The current financial crisis has exposed a cloud around derivatives structures and the profit and loss implications of using derivative instruments and other exotic financial structures. However, this lack of understanding was not limited to mortgages and prevails across all asset classes. This is particularly true of the commodity derivatives marketplace.

Centrally Cleared Derivatives: Mitigating Counterparty Risk for Institutional Investor

By Eurex Clearing

Historically, derivatives have always been regarded as falling into one of two subsets; exchange-traded derivatives (ETD), standardized contracts designed by and traded on a listed exchange, and over-the-counter derivatives (OTC) either highly standardized 'exchange look-a-like' contracts (estimated to be 70% of OTC equity derivatives transactions); or customised derivative contracts traded between two individual counterparties. The current turmoil in financial markets, with bank defaults and bailouts, has rightly focused attention on counterparty risk and brought into prominence and importance a new subset in derivatives; Centrally Cleared Derivatives (CCD), derivative transactions traded bilaterally and brought on exchange to benefit from the clearinghouse that is Central Counterparty (CCP) and thereby mitigating counterparty risk.

Board of Directors & Hedging Programmes

By Carlos Blanco & J.R. Aragonés, Black Swan Risk Advisors, LLC

Boards of directors need to take more responsibility for hedging processes, and most need greater technical assistance. How a firm manages significant market risks is fundamentally an investment policy decision that should be addressed at board level. The board is responsible for setting the business objectives for the firm, as well as establishing the risk tolerance and 'boundaries' for management to accomplish those objectives. However, the board should avoid micro-managing the hedge process. Their responsibility is to set overall policy, not to evaluate individual transactions or trading instruments.

Realistic Power Plant Valuations: How to Use Cointegrated Power & Fuel Prices

By Henk Sjoerd Los, Cyriel de Jong & Hans van Dijken; KYOS Energy Consulting

The large investments in new power generation assets illustrate the need for proper financial plant evaluations. Traditional net present value (NPV) analysis disregards the flexibility to adjust production decisions to market developments, and thus underestimate true plant value. On the other hand, methods treating power plants as a series of spread options ignore technical and contractual restrictions, and thus overestimate true plant value. In this article we demonstrate the use of cointegration to incorporate market fundamentals and calculate dynamic, yet reasonable, spread levels and power plant values. A practical case study demonstrates how various technical and market constraints impact plant value. It also demonstrates that plant value may contain considerable option value, but 64% less than with the usual real option approaches. We conclude with an analysis of static and dynamic hedges affecting risk and return profiles.

Forward Spreads on the German Power Market

By Franck Schuttelaar, Gaselys

Approximately 55% of the electricity generated in Europe comes from thermal power plants burning coal, gas or refined products. The cost of fossil fuels therefore plays a significant role in electricity price formation. To such an extent that - schematically - the analysis of market electricity prices is often reduced to a consideration of two distinct sets of factors. On the one hand, a more or less substantial part of the electricity price can be seen as directly linked to the value of the fuels used to generate it. Naturally, the link between fuel and electricity prices will be all the stronger if a substantial part of the production in the market in question comes from thermal power plants using fuels with a market value, such as coal, gas or refined products. Conversely, if the electricity comes mostly from plants whose generating costs are relatively independent of a commodity market, such as nuclear, lignite, hydro or wind plants, its price will probably show less sensitivity to the value of fuels or CO2.

Gas Storage Models

By Sebastiaan Vallinga, Viz Risk Management

Traditionally, flexible physical assets are run as part of an integrated business. Gas storage, for instance, can be offered as a grid service to balance variability in demand or to cover seasonal swings related to the heating season. It can also be used to compensate for the variability in demand for electricity through supporting the operation of gas-fired power plants. Deregulation of energy markets, resulting in unbundling the storage service from sales and transportation, and the emergence of liquid traded gas markets in the US and Europe, has driven the need for analysis of gas storage as a separate asset.

EFET: The First 10 Years ...

By the European Federation of Energy Traders (EFET)

Ten years ago, energy traders in Europe were sometimes seen as the 'cowboys' of the trading world, likely to jeopardise the efficacy of energy trading markets. Interestingly enough, during the current credit crunch, they have proved to be a remarkable stabiliser and their companies highly resilient in the face of the economic downturn in Europe. During yet another 'gas crisis' in January this year between Russia and the Ukraine, it became clear that, in the countries with a traded market (thus with multiple suppliers and a market price) there was substantially less turmoil. Energy trading is, contrary to the effects of some forces, assisting the security of supply of energy to Europe. EFET has proved itself to be 'ahead of the crowd' having suggested practical proposals for the necessary changes in European legislation and for the standardisation and harmonisation of energy business contracts in order to make the European energy industry more efficient, effective and competitive.

Section 3: Energy Technology

Breaking Down the Barriers to Holistic Risk Management

By Gary M. Vasey, CommodityPoint

The last few years have brought many significant changes to commodity markets and trading. As more and more money has flowed into commodities from an increasingly wider range of traders and investors, historical pricing relationships and trends have broken down, volatilities have increased, and price movements sometimes become disconnected from the underlying fundamentals. The banking crisis has seen commodity price formation switching rapidly from being focused on supply to demand as slowing global economic growth has reduced the need for raw materials. Prices have fallen rapidly, as has market liquidity, and counterparty and credit issues have taken centre stage with volatilities remaining high. Perhaps it isn't surprising then, against this background, that a recent study by CommodityPoint conclusively showed that risk management was the key critical business issue for 2009 and beyond for commodity trading firms. Indeed, during the first half of 2009 many commodity trading firms have been focused on examining their risk management processes, controls and systems as evidenced by the strength of demand for risk management software and consulting. In 2009, the focus is necessarily on holistic risk management and not just market or price risk.

Top 10 Energy IT Essentials

By Paul Mahady, Market Advisory Services (MAS)

The banking/credit crisis that began in 2007 has certainly changed the economic and capital markets landscape, the full consequences of which are yet to be fully seen and understood. The global power industry is feeling the effects ... and will continue to feel them for some time. Even before the crisis, utilities had been challenged by increasing labour costs, an aging labourforce, increased infrastructure costs and volatile material costs. The commodity markets, and broader energy industry in particular, were already experiencing significant industry change and continue to undergo major industry volatility, both in terms of price, participants, market structures and vacillating regulatory developments. The impact on investments and priorities will be significant for some years.

Putting Trading on the Right Track

By Wolfgang Ferse & Markus Seiser; OpenLink

Optimisation techniques have achieved widespread acceptance amongst European gas market participants in recent years, but, if optimisation is not truly integrated with energy trading risk management (ETRM), then its usefulness can be undercut. How will the new integrated solution created by OpenLink and its IRM subsidiary help traders navigate market complexity, make more informed decisions and assist with optimal portfolio construction?

Energy Data Management

By Richard Quigley, DataGenic

Markets thrive on uncertainty, as it brings risks, and risks provide the opportunity for rewards. Well, this used to be the case, but for most of this decade, energy trading and risk management has been arguably more conservative, with the notable exception of the investment banks and funds. The catalyst for this conservatism was the implosion of Enron in 2001 and the subsequent erosion of energy trading as a speculative profit making business. This is unfortunate. We are in the midst of the most uncertain period faced by the energy market since it was first opened to competition almost two decades ago and shoring up profits should be a priority if future infrastructure investments are not to be delayed. Energy companies are facing a new market paradigm in 2009 - an energy recession. One of the major consequences of an economic downturn is the removal of energy demand as industry cuts back output. Yet what is unknown is whether this demand is merely being deferred until economic activity picks up again or whether this demand has been permanently removed. The debate over the consequences for future demand is not only interesting, it is vital for future business planning as energy prices move on either supply/demand sentiment or actual physical fundamentals.

Conquering Complexity

By Wolfgang Ferse & Mike Prickett; OpenLink/ MCG Energy Solutions

Thanks to a labyrinthine market structure with varying conventions and information protocols, successfully navigating the North American power market is an arduous task. What are the challenges created by this complexity and how might the new joint venture between OpenLink and MCG Energy Solutions empower market participants through its integrated approach to trading, risk management and logistics? Even the most experienced North American power trader or scheduler would concede that it's a daily challenge to successfully operate in the North American power market, thanks to its fragmentation and opacity. Each regional market varies greatly in terms of its own particular market rules, products, contract specifications, settlement and fee structures. What's more, these rules and products are constantly evolving, which creates tremendous operational challenges and risks for all categories of market participants.

A Structured Approach to Risk Systems

By Mike Reilly, Progress Software

Within this decade, we have seen programmatic (or algorithmic) trading expand to become a significant proportion of trade flow within the securities markets. This technology is now well established from equities and futures to bonds and foreign exchange. The asset class where take-up has lagged is commodities. This article examines the challenges and opportunities in applying programmatic trading and risk management (PTRM) techniques on the physical commodity markets.

Smart Metering/1

By Tom Fryers, Sentec

With supplier requirements for the smart metering (SRSM) project nearing completion, and an announcement of the government's plans for smart metering imminent, Tom Fryers, of Sentec looks at what the UK can learn from deployments in countries that are ahead of the game and asks whether we are really on the right track.

+ Time for Some Smart Thinking/2

By Jim Hayward, Baringa Partners

On paper the benefits for suppliers are considerable. The intelligence generated by smart metering will give them much more information about their customers and how they use energy. It will enable them to segment the market in a more sophisticated way and offer tailored propositions to customers for additional energy products and services. Furthermore, it will also give suppliers much more flexibility to forecast and manage their customers' energy usage more accurately, which has significant potential benefits for suppliers, their customers and the environment. By helping customers to help themselves achieve lower bills with smaller carbon footprints, suppliers will be able to lay the groundwork for a much better relationship than has been possible to date.

Section 4: Environmental Markets

Colouring a Black Economy Green

By Jeremy Wilcox, The Energy Partnership

As with most new concepts there is no standard definition of a 'green economy', although the United Nations Environment Programme defines a green economy as "a fast growing new economic development model in contrast to the existing 'black' economic model based on fossil fuels… based on the knowledge of ecological economics and green economics that aim at addressing the interdependence of human economies and natural ecosystem, and the adverse impact of human economic activities on climate change and global warming." Before progress can be made in designing a new green economic model there has to be some consensus on the failings of the current black fossil fuel-based model. Yet there are no economic failings, as such. Fossil fuels cannot be blamed for the sub-prime induced 'credit crunch', yet it is the credit crunch and resulting global economic downturn that is being used as the catalyst for changing the economy from black to green.

US Cap-and-Trade: Compliance Options

By Kjell Olav Kristiansen, Point Carbon

Designing an effective US climate change policy regime. As this article goes to print, Members of Congress and their staff are busy at work on yet another bill to cap emissions of greenhouse gases (GHGs) in the United States. The prospects of an economy wide cap-and-trade programme appear strengthened by the arrival of a administration receptive to climate change action and favouring a cap-and-trade mechanism. Yet, at what time, and in what condition, a cap-and-trade bill will pass Congress remains unclear, especially given current economic conditions and priorities. If endorsed, an economy wide cap-and-trade programme in the US could generate a market three times the size of the EU's Emissions Trading Scheme (ETS). When directly or indirectly linked to EU and Kyoto markets, a US programme would lead to a further globalisation of carbon markets through price interdependencies and capital flows in support of emission reduction projects.

Global Emissions Map

WorldPower

CO2 Emissions - A New Asset Class for Institutional Investors

By Eurex Frankfurt AG

CO2 emissions trading is an important and efficient instrument to limit greenhouse gas (GHG) emissions. The European Union Emission Trading Scheme (EU ETS) was launched in January 2005 as part of the Kyoto Protocol on climate change. In 2008, it grew rapidly to a trading volume of 3.1 billion tonnes of CO2 allowances (market value €67 bn), with one tonne of CO2 representing one EUA.

North American Renewables

By the American Council On Renewable Energy (ACORE)

Just weeks into the new administration, the American Reinvestment and Recovery Act (ARRA) of 2009 set forth legislation putting renewable energy in the role of a central player in the Administration's plans to revive the US economy. A principal goal of the Act is to, "Revive the renewable energy industry and provide the capital over the next three years to eventually double domestic renewable energy capacity."

EU Climate Change Policy Beyond 2012

By Dr Stefan Ulreich, E.ON Energy Trading AG

Looking at its contribution to global GHG emissions, Europe accounts for a rather limited and decreasing share. This is mainly due to other regions showing a substantial increase in GHG emissions and Europe (or at least the EU-27) exhibiting emission reduction goals. Europe is able to develop and deliver technological solutions that will reduce harmful emissions and will consequently help other regions with their GHG abatement. Whilst Europe may lead the way, other regions will need to act urgently. To develop the required climate friendly technologies, investment in research and development and the deployment of new technologies are needed. Consequently, the most important task for any regulatory framework is to give sufficient incentives for such investments. Thus, old and carbon intense processes will be replaced by more efficient and low carbon technologies. The energy sector, as a major contributor to GHG emissions, has an obligation to make the necessary investments in a sustainable manner. The investment cycle of the sector, however, needs a reliable and predictable long-term framework and the climate change challenge needs a long-term view. It is not an issue that can be solved within a few months but one that can and must be solved within a few decades.

Clean Energy Investment Not on Track

By, Guy Isherwood, Editor, WorldPower

The impact of recession and low energy prices may push peak CO2 emissions back by more than a decade.

+ Green Funds Arrive at Market Maturity

By Peter C. Fusaro, Global Change Associates

It's been almost five years since the first green hedge fund appeared. Today, there are up to 100 green hedge funds and fund of funds. However, their strategies differ. They are in carbon emissions trading and carbon asset development, long/short cleantech and alternative energy market caps, water funds (including equities and water rights), forestry, and weather derivatives.

Section 5: Generation & Transmission

Power Plant Benchmarking - A Valuable Tool For Performance Improvement

By Elena Virkkala Nekhaev, World Energy Council

In 1974, the World Energy Council (WEC) established a Committee on the Performance of Generating Plant (PGP). One of the committee's objectives was collecting power plant performance indicators and statistics using WEC's global membership network. The ultimate goal of data collection was to establish benchmarks for power plant performance and develop tools for evaluating performance and identifying performance enhancing opportunities. A set of performance indicators was developed for assessing and interpreting plant reliability and availability statistics/unavailability factors. The main indicators were associated with major technological features, including plant technology, main fuel, age, output capacity and others. All units had to be base-loaded, i.e. operating for more than 40% of time. Thirty five years on, the PGP committee is still in business and busier than ever. The operating environment and technologies used for power generation have changed significantly during this time but the need for data to be able to compare plant performances has not disappeared. If anything it has become even more important, not least because of new challenges facing the industry today: Competitive pressures, concerns about supply security and the need to reduce greenhouse gas emissions.

Tomorrow's Smarter Grid: Evolving Towards New Value

By Forrest Small & Jacquelyn Bean, Navigant Consulting

A confluence of forces is beginning to transform the electricity landscape. They are driving the evolution of an electricity infrastructure that is more efficient, more reliable and integrates a diverse mix of energy resources, including renewable energy. Commonly referred to as the 'Smart Grid', this infrastructure is widely recognised as playing a fundamental role in addressing our energy challenges over the coming years.

Carbon Capture & Storage: Reality Check

By Elena Virkkala Nekhaev, World Energy Council

The long-term trends of global population growth and economic development are set to continue for decades despite temporary slowdowns such as the one the world is currently witnessing. The underlying demand for energy worldwide will not disappear, especially since there are nearly two billion people in the world - about a third of the total population - who still lack access to commercial energy. The increasing production and use of energy and fossil fuels in particular, have a number of serious impacts, including the growing concentration of greenhouse gases (GHGs) in the atmosphere, which threatens to result in an irreversible change of climate, i.e. global warming. Since today there is no realistic large-scale alternative to fossil fuels, especially for road, sea and air transport, the world is looking for ways of using fossil fuels in a more environmentally sustainable manner.

The Impact of Renewables on the Electric Grid

By Doug Houseman, Capgemini

The regulators are coming, the regulators are coming ... and they are going to force changes in our industry. With political requirements to reduce carbon, deal with climate change, be greener, allow local participation in the power grid, and to try to manage the cost of energy, regulators are changing the requirements for what is allowed on the grid. Renewable generation is the buzz word today and regulators do not want to be left behind. In the US, more than 30 states now have renewable portfolio standards (RPS) - mandatory percentages of power that have to be produced and delivered from renewable sources by specific dates. In some cases, the RPS requirements kick in as soon as 2010, in others the first real requirement is not until 2025. In any case, in the US, state requirements will require that an additional 1% of the total electric power consumed to be produced by renewable sources each year. In Europe, the 20:20:20 initiative will force a similar requirement. The manufacturers of renewable generation devices are all running at full capacity and looking to increase it. GE Energy will double wind turbine production again in 2009 and yet again in 2010 and they are completely sold out until 2012. Other manufacturers are in a similar situation and the type of renewable generation they produce matters little. Incentives and subsidies, rather than real economics, are driving sales (together with regulatory requirements).

The Unbearable Lightness of Wind

By Ross McCracken, Platts

The omens for wind power are very good, and there is cause to believe that the EU's 2020 targets in this area will be exceeded. However, as capacity grows, it may be wind's impact on electricity prices that presents the most immediate problem. Wind's intermittency cannot be wished away, even if it can be ameliorated, and the development of the infrastructure needed to deal with it is lagging behind the installation of wind power itself.

Nuclear Power Rises Again

By Stephen Kidd, World Nuclear Association

Renewed growth will require a great deal of political will combined with considerable energy and innovation from the industry and its backers.

Appendix 1