Portfolio Management

This chapter discusses portfolio management in energy markets. The discussion presents various angles, reflecting the perspectives of companies engaged in energy trading. In the first section, we discuss proprietary trading. While it is an art to do it profitably, it is the simplest form of portfolio management in our analysis as it is purely focused on opening and closing positions on the wholesale market. In the second section, we analyse an energy utility with a retail focus, i.e. energy is bought on the wholesale market but mostly sold to retail customers who consume the energy. The section discusses the different types of customers and contracts, and procurement strategies. In the third section, we move to an energy utility with a generation focus, and learn concepts such as spreads, swaps, optionality, hedging and marketing flexibility. In the fourth section, we combine wholesale markets, generation assets and the retail segment to study truly integrated portfolio management. This describes the situation faced by tier-one energy companies, large municipalities and large, energy-intensive industrial companies. Here we review the open position of an integrated company and show advanced financial products that can be used to manage integrated portfolios. We also give a practical example of what a day on the trading floor looks like. In the fifth and last section, we demonstrate the application of performance measurement to identify the sources of a company’s success or shortcomings, both for the company as a whole and within a company.