Energy Market Participants: The Risks of Being a Jack-of-All-Trades

Those that attempt to participate in more than one area of forward energy markets will be internally conflicted in terms of performance measurement and risk profile.

In the past year, much consideration has been given to the design of the wholesale power market. This effort has been directed primarily at the market structure of the physical system and the definition of the markets necessary to create incentives for delivery of reliable power. Yet, scant attention has been paid to identifying the conditions necessary for maintaining a successful and liquid forward market and the various roles that a participant may play. Identifying this aspect of market development is especially important, as there exists a critical relationship between the market structure in which a company operates, the assets it controls within that market, and the role of the company as a market participant.

Forward markets are particularly important in power because they provide the pricing signals necessary to make decisions on major capital investments that are necessary to ensure reliable power delivery. While it is important to have well-functioning spot markets for power, these provide insufficient information to decide on capital investment in this sector. Forward markets provide the insurance mechanism for buyers and sellers wanting to lock in price certainty. Price certainty contributes to cash flow certainty, which is critical to definition of the funding structure of any business.