Corporate risk management in European energy markets

ABSTRACT This paper sets out to define, estimate, forecast and aggregate relevant risk measures for corporations participating in the European energy markets. The main objectives are therefore procedures for individual risk component management as well as risk aggregation procedures. The paper uses several complementary lines including conditional and stochastic volatility/correlation models applying time series data from the Scandinavian energy market (Nord Pool) and the European energy market (Phelix). Corporate hedging is mainly advocated when financial distress/bankruptcy costs are important for a corporation's continued operations. Moreover, since the ownerships of many energy corporations are publicly concentrated and, in addition, historically municipal and central authorities have dominated, relevant risk measures can also incorporate non-systematic risk factors. Relevant risk measures for a general corporation in the energy market may therefore incorporate market, operational and business risks. Risk management for energy corporations may therefore become more demanding than for comparably dispersed and widely owned industries.