Risk-BU & Carmen in 4 questions

General information

Risk-BU and Carmen are both part of the RISE software suite, developed by R&D. RISE consists of several simulation tools for energy and financial markets, asset valuation and risk management.

Technical aspects

Do the software have any graphical interface?

  • Yes, Risk-BU et Carmen have graphical interfaces for input data entry and visualization of results
  • It is also possible to run the computations without graphical interface, if it is more convenient for the user.

What kind of methods are implemented in the softwares?

  • Risk calculations by Monte Carlo methods.
  • Valuation and hedging of optional assets (in particular Longstaff-Schwartz method), using the open source library StOpt, developed by EDF R&D, which is also part of the RISE software suite.

Which inputs are needed?

  • Carmen needs historical prices quotations to calibrate the price models used in RiskBU
  • RiskBU needs the price models calibration from Carmen, and characteristics for the assets or the portfolio analyzed, for example:
    • The power capacity and the variable cost for a gas power plant,
    • The volume, the price index and the delivery period for a delivery contract for a commodity,
    • Or the kind of hedging strategy to study (statuc, dynamic, frequency of hedging, etc.).

What kind of outputs are available?

  • Carmen : calibration parameters of factorial price models
  • Risk-BU : assets valuations, financial and risk indicators : Cumulative Earnings, Mark to Market, Gross Energy Margin, Deltas, Earning at Risk, Value at Risk, etc.

Description

Deregulation of the retail market, the growth of wholesale energy markets and international expansion have exposed the EDF Group to fluctuations in energy market prices that could significantly impact its financial results. But more generally many companies are exposed to fluctuations in wholesale energy markets: electricity, gas, coal, petroleum products and CO2 emission certificates. This can significantly impact their financial results. This is why it is crucial to implement a risk policy in these markets and to implement an optimal portfolio management to reduce these risks.

This is the case in the EDF Group, and this policy applies to EDF and the entities over which it exercises operational control.

AN EDF GROUP-WIDE RISK MANAGEMENT POLICY

The energy markets risk management policy is designed to:

  • set the overall framework within which Group entities operate (in terms of energy generation, optimisation and marketing) and interact with EDF Trading
  • consolidate the structured energy market exposure of all entities over which EDF exercises operational control
  • implement a Group-wide coordinated hedging policy

The policy is supported by a system of risk measurement and risk indicators, with alert procedures that are triggered to notify the Group management team of any risk threshold being exceeded. The Risk-BU and CARMEN software packages were developed against policy and ensure its appropriate application at entity level. They also calculate the risk indicators identified in the Group-wide policy. These software packages are distributed by R&D and used by Group entities to regulate energy market risks in France and internationally: EDF Energy, EDF Luminus, Dalkia, etc.

MULTIPLE USES

Risk-BU enables asset portfolio modelling (customer contracts, generating resources, hedges, etc.) and portfolio management simulation based on a set of price scenarios. The results generated can then be used to calculate the various risk indicators identified in the policy:

  • mark to market
  • sensitivity to market conditions (delta, gamma, etc.)
  • Value at Risk (VaR)
  • Earnings at Risk (EaR)

CARMEN enables the calibration of market parameters (market volatility and inter-market correlations) needed to simulate coherent future market conditions in Risk-BU.

Contact

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  • Energy markets risk
    Portfolio management
    Hedging
    Calibration