Portfolio optimization activities manage the Company’s exposure to price movements of electricity and natural gas. Capital Power purchases and sells electricity and natural gas under physical and financial transactions with the objective of matching volumes and terms or taking positions in electricity or natural gas within limits established under the Company’s risk management policies. The primary objective of Capital Power’s portfolio optimization activities is to maximize wholesale revenues while minimizing risk associated with power price volatility.
Capital Power manages its output from its Alberta commercial plants and acquired PPAs (with the exception of Joffre, which is managed by ATCO) as a networked hub, meaning that it sells forward contracts that are non-unit-specific, reducing its exposure to plant availabilities. From time to time, Capital Power also takes specific and limited positions in the electricity or natural gas markets to generate trading profits as opportunities arise.
Capital Power’s commodity portfolio team performs the following functions:
- Determines the scheduling of output from generation assets to meet contractual obligations and to optimize returns while managing generation and transmission risks, including unplanned outages.
- Manages Capital Power’s commodity portfolio and counterparty risks.
- Acquires and schedules deliveries of natural gas supplies used to generate electricity, in particular with respect to the EPLP plants and Clover Bar.
- Derives earnings from the wholesale trading of electricity and natural gas, and the participation in Alberta’s ancillary services (electricity reserves) market.
The commodity portfolio management team has been in place for more than seven years and has experience in major North American electricity markets, including the Alberta, Ontario, New York Independent System Operator, Midwest Independent System Operator, California, and California-Oregon Border power markets. The team also has experience in the NYMEX and AECO natural gas markets.
GHG Offset Markets
Capital Power is a leader in Canada’s emerging GHG offset marketplace and has one of Canada’s largest portfolios of GHG offset projects through purchases and project development. Capital Power’s Commercial Environment group is responsible for ensuring the company’s compliance with environmental regulations and monitoring emerging standards for both risk management and to identify opportunities. The GHG offset investments and purchases are designed to proactively manage potential compliance risks associated with GHG regulations.
Capital Power has entered into bilateral commercial arrangements for the purchase of credits that have proven consistent with the Alberta Specified Gas Emitters Regulation, and is pursuing projects that it expects will be recognized under the forthcoming Canadian Federal GHG regulations.
Risk Management
Capital Power’s portfolio management and trading activities are subject to oversight by Capital Power’s Risk Oversight Council (ROC), a senior executive group including the Vice President, Risk Management, which reports to the Board of Directors. ROC develops and implements procedures and practices consistent with the company’s Energy Commodity Risk Management Policy and Counterparty Credit Risk Management Policy.
Capital Power controls its trading activities by measuring and reporting risk, validating transactions, valuing the trading portfolio and managing and reporting credit. Capital Power uses mark-to-market valuation and a value-at-risk (VaR) determination to assess the risk of its trading activities and actively manages its aggregate VaR exposure within approved limits as set out in the risk management policies.
General oversight, policy review and recommendation, and reviews of commodity risk compliance are undertaken by the ROC. The Vice President, Risk Management, is generally responsible for monitoring compliance with risk management policies. Risk management is a key component of the company’s culture.
Capital Power employs VaR as the basic component to measure the risk in its energy commodity portfolio. VaR is the maximum expected loss over a given period of time at a given level of confidence. Capital Power’s VaR is calculated at a 95% statistical confidence level over a holding period of 20 business days. The VaR calculation incorporates positions, forward prices, price volatilities and correlations as major input variables.
VaR is not a perfect measure of risk. Capital Power applies a factor to the calculated VaR amount to attempt to capture unaccounted for exposures. The resulting measure is referred to as the total exposure of the portfolio.
To supplement its VaR estimates, Capital Power uses stress-testing and scenario analysis on the electricity and natural gas portfolio. This testing is used to determine the resulting financial effects on the portfolio in relation to Capital Power’s VaR limits.
Capital Power employs operational limits for its energy trading operations, including position limits, transaction limits and stop loss limits. Key risk measures in relation to the applicable limits are reported daily to ROC and quarterly to the Board, and any incidence of limits having been exceeded must be reported to the Board of Directors.