Bounding the Composite Value at Risk for Energy Service Company Operation with DEnv, an Interval-Based Algorithm

Deregulation in the power industry drives competition. It also increases the risk of doing business. Therefore it is important to manage and assess the risk. Value at risk (VaR) analysis has been used in financial institutions to evaluate portfolios of assets for some time, but the application of the approach in the power industry has not been established. The VaR of serving customer demand using the energy purchased on the auction market is our focus. In this paper, the risks of the energy service company (ESCO) are identified and the contract specifications and the VaR reviewed. In describing the difference in the business environments between the power and financial industries, the VaR analysis that has been used in the financial industry has been remodeled to best describe the assumed deregulated power environment. The pros and cons of the VaR levels are presented. As a consequence of the the interval-based computational core of DEnv (Distribution Envelope Determination), results are validated with respect to two sources of potential error.