Allocation of risks in a competitive electric market
- Morgan Stanley, New York, NY (United States)
To many, recent developments in electric markets are perplexing. Competition has appeared, often in the form of new players who do not own and operate generation or transmission facilities. Yet, these players happily enter into contracts obliging them to make or take delivery of power at set prices for months or even years into the future. They seem unconcerned about predicted capacity shortages, fuel price uncertainty or unpredictable plant outages. For the most part, these new players understand these risks quite well. They simply believe in the efficacy of markets. Until recently, price ensured recovery of cost. They foresee a true market where price makes supply equal demand and cost is not a factor in the short term at least. The appearance of such players is an augury of the new industry structure, one in which specialists in taking and managing distinct business risks evolve from within or enter from outside. They take and manage price risk in much the same way that other new entrants will take on other risks. In the old, regulated electricity market, costs set prices, quite independently of demand. In a normal market, price is what it needs to be to make supply equal demand. Before, without a market-clearing price, capacity reserves ensured no shortages resulted. The market is now moving to market pricing. The new market players are a symptom of that change. They can access efficient forward gas and oil markets to partially hedge that risk. They understand the methods of measuring price risk so their hedges are not overly expensive or ineffective. They keep and manage some risks and subcontract the others. Expensive risk premiums are thus eliminated through cost-effective risk management by experts in each type of risk. Examples of risks in electric markets are power plant operation risk, power price risk, power system maintenance risk and power pool operation or price discovery risk. All must be managed and specialist will arise to manage each.
- Research Organization:
- Electric Power Research Inst., Palo Alto, CA (United States)
- OSTI ID:
- 254461
- Report Number(s):
- EPRI-TR--106232; CONF-960330--
- Country of Publication:
- United States
- Language:
- English
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