Structural modelling to manage risk in the energy sector
Dr Michael Coulon has collaborated with energy companies in Europe and the US to design and implement new mathematical models for managing electricity price risk in the face of rapidly changing market conditions.
Modern wholesale power markets face many challenges, including highly volatile fuel and power prices, complex periodicities and dramatic price spikes, and the rapid growth of renewables, which can be unpredictable and hard to control. While some of these issues have been widely studied over several years, others are very recent, rapidly changing phenomena that demand innovative, flexible modelling frameworks.
A hybrid approach to modelling
For many years whilst working at Sussex, Dr Michael Coulon, former (and now Honorary) Senior Lecturer in Accounting and Finance, has been at the forefront of innovative model development for energy markets. His research has focused on developing practical, easily implementable structural models that can be tailored to particular markets and applications.
Michael’s unique hybrid approach to modelling provides a major advantage over classical approaches. Pure econometric statistical price models that look only at price without considering supply and demand drivers can miss the complexity of a market. At the other extreme are complex optimisation models, which consider supply and demand details such as individual generator constraints. The hybrid models developed by Dr Coulon retain the advantages of simpler structural models while providing a greater level of detail – capturing regional fuel mixes, demand patterns and price variations in order to better manage and hedge against geographical distributions in supply and demand.
Using models to support business
Putting his research into practice, Michael began working with the research team at Alpiq, a leading Swiss energy company which operates in 31 European countries. This led to a formal collaboration between the University of Sussex and Alpiq in 2018. The collaboration initially focused on developing a cutting-edge structural model for price dynamics of the German power market, and subsequently shifted towards new modelling challenges specific to the growth of renewables, in particular wind park management. Through the collaboration with Alpiq, Michael co-authored a book chapter which explained recent modelling advances to both academics and energy market practitioners.
Michael has also worked on projects with three US companies, applying his modelling techniques to power markets as well as developing structural price models for solar renewable energy certificate markets. By sharing his insights and adapting his research to offer bespoke models, Michael has enabled these companies to better understand and mitigate financial risk, make stronger business decisions, value complex products and investments, and hedge changing risks, while adapting to the energy landscape of the future.