Energy Trading: Down But Not Out

Deck: 

The speculative electricity trading industry has a bad case of rigor mortis, but current efforts might breathe new life into the practice.

Fortnightly Magazine - January 15 2003
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Trading is dead. At least that’s what some analysts are saying about the electricity markets. “Trading died with Enron on Dec. 2, 2001,” says Mark Williams, an energy risk management expert at Boston University.

Evidence of this death surrounds us. Former trading leaders like Dynegy, El Paso, and Williams have dropped out of the markets. UBS Warburg is consolidating the former Enron Online operation into its Connecticut-based trading operations and laying off three-fourths of the Houston staff. Volume has evaporated, and a once-liquid market has turned opaque. Price discovery has become an inefficient, brute-force process.

Things look grim, but Williams qualifies his death-declaration by defining “trading” as speculating on long and short positions. “What’s left is hedging, asset optimization, and risk mitigation,” he says.

Whether trading is really dead or not, some signs of a rebirth are beginning to emerge. Major money center banks—most notably Bank of America—have moved to become electricity traders. A new industry group, the Committee of Chief Risk Officers (CCRO), recently issued a series of recommendations for standards and best practices that may restore confidence in the utility business. And as this article went to press, the New York Mercantile Exchange (NYMEX) announced plans to launch a new set of daily, weekly, and monthly electricity contracts.

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