Speaker: Steve Perfect
Title: Applications of VaR and EaR in Power Portfolio Risk Management.
Affiliation: Florida Power and Light.
Date: Friday, March 23, 2001.
Place and Time: Dirac Science Library, 4th floor, 3:30 pm.

Abstract.In the presence of deregulation and market change, the typical utility's view of risk has evolved from one which examines operational risk alone to one which now incorporates risk arising from exposure to traded markets. Corporate decision-making now mandates use of quantitative methods such as value at risk (VaR) and earnings at risk (EaR) to measure and manage this exposure.
    Essentially VaR is a way of measuring the possible loss to the portfolio over a measured period of time for a specific confidence interval. VaR for a given portfolio is intended to be larger than all but a certain fraction of trading outcomes. Due to the recent popularity of VaR in corporate decision-making, many variations of VaR have come into being including daily VaR (DVaR), delta VaR, cash at risk (CaR), and credit-at-risk (CVaR), and earnings at risk (EaR). The scope of this discussion will be the application of VaR and Ear in power portfolio risk management. In practice, VaR requires that the decision-maker first set limits for the maximum permissible VaR. Specified VaR limits may then be achieved by adding measures to reduce risk. Hedge positions may be set up to reduce the exposure inherent in contracts for the forward sale of generating output against an asset. Further reduction of VaR may be achieved through the introduction of appropriate uncorrelated assets to the portfolio. An obvious example of this is the combination of wind and fossil assets in the same market area.
    EaR analysis leads to an efficient frontier view for asset portfolios whereby earnings may be optimized over a continuum of risk tolerance levels. Assuming you know what your risk tolerance is, an optimal portfolio of assets and contracts may be established based on EaR analysis.