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So, You Want to be a Retail Energy Marketer?

Retail energy markets entail a unique set of risk management challenges.
Fortnightly Magazine - March 15 2002



Finally, portfolio build risk is associated with the difference in price from the time the customer offer is made (or accepted depending on contract terms), and hedgeable levels are reached within the portfolio. These levels are subsequently backed with an analogous purchase. The risk associated with build volume can also pertain to the time it takes the portfolio size to reach optimal levels. This risk can have a potentially significant impact, since the granularity of retail loads are extremely difficult to hedge in the wholesale market, leaving a portion of the retail portfolio exposed. This unhedged volume is subject to the volatility and directional movement of the power market. It will eventually reach a level that can be backed, though not exactly, in the wholesale market. Using the components of volatility, time, price and volume, an exposure can be determined. The cost of this exposure should be passed to the customer.

Of course, all the other risks a retail energy marketer faces-business, commodity, credit, etc.-while significant and problematic, cannot be considered unique to this market segment. For these, the retail energy marketer can look to the best practices employed by their wholesale counterparts for mitigation strategies.

To protect themselves against the unique risks they face, retail energy marketers will need to be innovative and leverage off of their existing core competencies in risk management to build new capabilities. Specialized retail-hedging groups and programs should be created to properly capture and manage this unique exposure. Outside experts can be brought in as well. Regardless of whether this is done internally or externally, the retail energy market leaders of tomorrow will be the ones who combine their expert knowledge with proper risk assessment and control.

  2. In March 1998 there were more than 300 REPs registered with the CPUC, as of June 2001 there are 28.
  3. E.g. EES reportedly suffered market risk with their short position in California during the 2000-2001 power price spike, SESCO suffered credit and operational risk with their billing operations in Georgia, New Power has suffered credit and operational risk (billing and charges of "slamming" for customer acquisition in ERCOT).
  4. These risks are not new risks - they existed under prior to deregulation, but their market effects were softened as a result of the regulatory paradigm.

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