Energy Trading

Introduction and Overview

Dr. Stephan Illerhaus
SS 2016

General Information

TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Organisation and general information

Lecturers:
Stephan Illerhaus (Director Trading, Stadtwerke Mnchen GmbH)
Adriana Kiszka (Center for Energy Markets, TUM)
Time and location:
Monday 17:00 20:00 (as announced)
Room 2270
Excursion to SWMs trading floor planned for 11 July
Exam: Written exam, 60 minutes
ECTS 3

TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Literature (text books)

[BHA2011]

Bhattacharyya, S.: Energy Economics Concepts, Issues, Markets and

Governance. Springer 2011.

[BOR2006]

Borchert, J.; Schemm, R.; Korth S.: Stromhandel Institutionen,

Marktmodelle, Pricing und Risikomanagement. Schffer Poeschel 2006.

[BUR2008]

Burger, M.; Graeber, B.; Schindlmayr, G.: Managing Energy Risk. Wiley
Finance 2008.

[ERD2010]

Erdmann, G.; Zweifel, P.: Energiekonomik Theorie und Anwendungen.

Springer, 2nd Edition 2010.

[FIO2012]

Fiorenzani, S.; Ravelli, S; Edoli, E.: The Handbook of Energy Trading. John
Wiley & Sons 2012.

[HUL2011]

Hull, J.C.: Options, Futures and Other Derivatives. Prentice Hall, 8th Edition,
2011.

[JAM2008]

James, T.: Energy Markets Price Risk Management and Trading. Wiley
Finance 2008.

[KON2009]

Konstantin, P.: Praxisbuch Energiewirtschaft. Energieumwandlung, -transport

und -beschaffung im liberalisierten Markt. Springer, 2nd Edition, 2009.

TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Introduction & Motivation

TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Trading of electricity just an illusion?

electricity
markets

TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

A first view on a marketplace (example: auction based)

Organizer = broker

Product (specs)
Counterpart / rating

Bid
Delivery / invoicing
Source: Ebay

Electronic platform = IT

Price

TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Whats your view on energy prices and markets?

this is indeed an interesting question,
generally too high,
common scepticism on the energy business in general.
Discussion is guided by misunderstanding and confusion
wholesale market vs. end-user,
spot vs. forward markets,
role of grid charges, taxes and EEG,
national focus vs. European transmission system,
complexity of technical and economic interrelations
General view:
The energy market is a monopoly market.
Energy trading has no other role than feeding greedy traders.
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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Whats your view on energy prices and markets?

TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

The central role of trading within the value chain (1/2)

storage, international transport / transmission

exploration
(fossiles, uranium, biomass)

production
/ mining

sales /
trading
(crude oil, coal,
gas, uranium)

processing
/ refining

trading
(petrol, diesel, coke, gases, nuclear fuel rods,)

generation
renewable energy
sources
issuance of
emission rights

(electricity,
heat)

trading
(electricity)

trading of
emission rights

Consumer / Prosumer

sales,
retail

excess energy

national transport, transmission

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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

distribution

The central role of trading within the value chain (2/2)

Generation
Supply
Contracts
Production

End-user
Customer
Wholesale
Energy
Trading

Make or buy

Wholesale
Energy
Markets

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Sales

Private
households
Commercial
Customers
Large Industrial
Customers

Typical set-up of a trading organisation (1/2)

Risk Committee

Board of Managing Directors

Risk Controlling

Analysis

Portfolio Mgmt

Front Office

Back Office

Risk Mgmt

Trading Unit
Shareholdings
Strategy
IT
Legal
Accounting
Controlling
Tax
Treasury

Market Price

Sales

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Generation

TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Trading Counterparts
Energy Exchanges

Typical set-up of a trading organisation (2/2)

Front Office:
Providing direct market access to all relevant commodity markets as well as entering
proprietary trading positions within defined limits;
Management and optimization of short-term physical positions, i.e. ensuring physical
flows (day-ahead and intraday), optimizing daily nominations and intraday operations,
respectively,
Portfolio Management: Risk-reward optimization of the portfolio as well as central
responsibility for procurement and marketing,
Risk Management/Controlling: Implementing performance and risk/reward indicators as
well as controlling limits given by the management,
Analysis: Providing a proprietary market opinion as a basis for trading and portfolio
management decisions;
Information Technology: operation, maintenance, development of all IT systems,
Back Office: Settlement and controlling of internal and external deals as well as
documentation of trade contracts and cash flows.

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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Typical job roles (1/8) the TRADER as an example

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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Typical job roles (2/8) the TRADER as an example

Product = Structure + delivery period

Volume/quantity in MWh/h
Market = bid (buyer)
offer/ask (seller)
in EURper MWh/h
Spread = ask bid

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Typical job roles (3/8) the PORTFOLIO MANAGER as an

example
50

Examples for complex

products:
Energy storages
Products with flexibility
Real options
Swing options

45

40

35

30

25

20

15

10

10

20

30

40

50

60

70

Geometric Brownian Motion of a Future

20

15

10

-5
20

25

30

35

40

45

50

Forward Curve Dynamics

Tools:
Financial mathematics and stochastic
Portfolio Theory and financial engineering
Simulation and analytical approaches
Algorithms and Optimization
Implementation in Excel, VBA or MATLAB
Dynamic Hedging

Least-Squares-Monte-Carlo Simulation
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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Typical job roles (4/8) the PORTFOLIO MANAGER as an

example
Fuel
Power
EUAs

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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

returns from power

./. tot. fuel costs
./. costs for emission rights
= clean spread

Typical job roles (5/8) the OPERATIONS MANAGER as an

example
T: turbine
G
T
G: generator
M
M: measurement
M
: local grids

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TypicalGerman
job roles
(6/8)transmission
the OPERATIONS
MANAGER as an
power
grids
example
600 MW
1,550 MW

800 MW

3,200 MW

1,500 MW
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2,200 MW

TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Source: Google Maps

1,200 MW

3,850 MW

Typical job roles (7/8) the ANALYST as an example

CO2 & gas prices
Cold winter

Hot & dry summer:

consumption (AC) &
cooling water problems

Hot & dry summer:

consumption (AC) &
cooling water problems

Coal &
oil prices

Financial crisis
begins

Fukushima/Moratorium
& revisions; dry & cold
Hot & dry summer:
consumption (AC) &
cooling water problems

CO2
prices

Cold spell

EU ETS
collaps
Wet & mild
holidays

Mild winter
Start of EU ETS windy

Economic crisis
drop in industrial
energy demand

Wet & mild, wind

holidays

Source: EPEX

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auf
den
Strompreis
TypicalEinflsse
job roles
(8/8)
the ANALYST as an example
Substantial fundamental changes in the years to come...
national political framework (Energiewende), e.g. nuclear decommissioning,
expansion of transmission and distribution grids
European framework, e.g. emission reduction commitments
future generation mix and further growth of renewable generation capacity, stability
of grid operation
Wind power generation capacity (in GWp)

PV power generation capacity (in MWp)

Source: PointCarbon

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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

To sum it up Energy Trading is interdisciplinary!

Science
Maths

Legal
Economics

Energy
Trading

Acc./
Contr.

Interna
-tional
Engineering

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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

IT

Role of Energy Trading from a Utilitys

Perspective

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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Stadtwerke Mnchen (SWM)

belongs to Germanys largest utilities
one of the two largest municipal utilities in Germany
contribute to Munich being one of the leading business
centers of Europe

fields of business
power (generation, distribution, sales)
district heating (generation, distribution, sales)
natural gas (exploration, distribution, sales)
water (catchment, distribution, sales)
public swimming pools
public transport (subway, busses, tramway)
telecommunication

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SWM facts and figures

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Customers

more than 1.2 million (energy & water)

Employees

about 9,700

Turnover

about 6.1 billion Euros

Power grid

about 12,000 km

Heating grid

about 800 km

Gas grid

about 6,000 km

Water grid

about 3,200 km

Transport grid

about 636 km

TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

SWM power and heat plants: local installations

Conventional
3 large CHP plants (gas, coal)
2 gas turbines
8 heating plants
1 communal heating/power
station (mini CHP)
25% share in nuclear station Isar
2 (operator: E.ON)
Renewables
11 hydro plants
1 wind power plant
various solar installations
2 geothermal heating plants
2 biogas plants
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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Power generation and district heating (DH) in Munich

District Heating
with steam

Annual Production:
~ 5,200 GWh DH
~ 8,500 GWh Power
Maximum Load:
~ 1,500 MW DH
~ 1,250 MW Power
Installed Capacity:
~ 2,800 MW DH
~ 1,700 MW Power

District Heating
with hot water

Source: SWM
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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

SWMs energy strategy

Long term security of supply
target: in 2014, SWM will be supplying gas to all Munich
households independently from Russian gas supplies
subsidiary Bayerngas Norge AS, Oslo, Norway
current status: 40 gas licenses in NO +DK + GB shelf areas, 7 of
which are producing / being developed

Renewable energies expansion campaign

target: in 2025, SWM will generate enough renewable electricity to
be able to supply the entire city of Munich (7.5 TWh)
estimated investment volume: 9 billion

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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

SWM generation and production plants

MUNICH AND REGION
13 hydro power plants
wind power plants
geo-therm power plants
2 bio-gas power plants
19 photo-voltaic plants
SWEDEN

GERMANY
3 offshore wind parks (North sea*)
GREAT
BRITAIN

14 onshore wind parks

2 photo voltaic plants

BELGIUM

GERMANY

POLAND

EUROPE

Mnchen

offshore wind park (UK*)

FRANCE
CROATIA

onshore wind parks

(Belgium, France, Croatia, Poland, Sceden*)

SPAIN
MUNICH AND REGION

solar-thermal plans (Spain)

* under construction

8/2014

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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Commodity & Energy Trading

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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Commodity and energy trading general remarks (1/5)

Commodity: raw or primary goods or resources, where the producer has no or
little relevance for the buyer.
Examples:
Metals (copper, iron ore, aluminium, gold, )
Agriculture (soya beans, cattle, coffee, wheat, ..)
Energy (crude oil, heating oil, electricity, coal, )
Standardisation of goods and their (physical) characteristics facilitates trade,
since goods of equal property can be easily substituted (fungibility).
Development of standard contracts creates (organised) markets and provides
liquidity as prerequisite for (global) commodity trading.

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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Commodity and energy trading general remarks (2/5)

Commodity trading has a long tradition includes a variety of goods, e.g.:
Chicago Board of Trade created the first futures exchange in 1848.
NYMEX in New York 1872.
LME in London 1877.
WTB in Hanover 1896.
Market usually split up into
Spot market
Commodity is physically delivered (and paid for) immediately after the spot
transaction or with only little delay.
Forward market
Commodity will be physically delivered (and paid for) at a fixed future date for a
price fixed already today (or at time of transaction).

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Commodity and energy trading general remarks (3/5)

Source: bloomberg.com

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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Commodity and energy trading general remarks (4/5)

Source: ft.com

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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Commodity and energy trading general remarks (5/5)

Other useful web links (examples):
European Federation of Energy Traders efet.org
Bundesverband der Energie- und Wasserwirtschaft bdew.de
Energy exchanges
European Energy Exchange eex.com
NASDAQ OMX nasdaqomx.com
IntercontinentalExchange theice.com
APX apxgroup.com

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TUM Energy Trading | Part 1 | Dr. Stephan Illerhaus 2016.

Thank you very much for your attention!