How obscured spot prices, unhedgeable basis differentials, unreliable and financially insecure clearing practices inhibit market liquidity.
Becky Kilbourne is a director and a leader of the practice around electricity market operators and Robert Maxant is a partner and practice leader for Deloitte & Touche’s Global Energy Markets practice. Becky brings over 20 years of experience in the electricity industry, including her most recent experience as a founding director at the California Power Exchange. Robert has extensive experience in the capital markets and their translation to risk management in the energy industry.
While much effort has been expended in translating the complex engineering paradigm of vertical integration and economic dispatch to parallel market structures, there has been little focus on the infrastructure required to support an efficient overall market structure for electricity. The recent "RTO Week" sponsored by the Federal Energy Regulatory Commission (FERC) touched on some of the RTO market design issues that either thwart or facilitate forward markets for electricity. However, to date there has been little clarity as to how the physical and financial markets would work together to eliminate the need for continued price regulation, as FERC has proposed.1
RTO infrastructure decisions, to the extent they facilitate robust and liquid forward and spot transacting, are the key to establishing a well-functioning electricity market. As in other U.S. commodity markets, equilibrium-seeking behavior in both the financial and physical markets is desirable in that it enables the market to "self-correct" supply and demand imbalances and obviate the need for price regulation. Given these broad objectives, RTO designers and policymakers should strive to implement an infrastructure that supports three key market attributes: (1) transparent and reliable delivery markets; (2) a reliable index for cash settlement; and (3) financially secure clearing practices.