Designing Wholesale Energy Price Risk Management Products

The Situation

During a period when wholesale energy prices set extreme records, a reinsurance firm wanted to identify ways to effectively manage price exposures resulting from increasingly deregulated markets.

NERA's Role

NERA's risk experts concluded that any party with an obligation to supply electricity at a fixed price was at risk, and examined different options for hedging against these price risks.

The Result

NERA provided the analysis to support development of Asian options to protect against the average electricity price being above some strike price, as well as dual trigger options that protect against buying expensive power when a firm's own generation capacity is unexpectedly unavailable.