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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.
Fortnightly Magazine - June 1 2003

of forward contract abrogation by state or federal government creates a perception that contracts may be subject to renegotiation in extreme market scenarios. This creates a wider bid-offer spread due to the uncertainty of final outcome for long-term contract holders who may think they are hedged but discover otherwise due to contract negotiation.

Conclusions

A company's market role cannot be decided in isolation. The asset position will drive the company's broad choice of market strategy (see figure at left). The natural long/short position as well as the nature of the position will drive the degree of active participation that is necessary to achieve maximum value for the asset. The structure and liquidity of the individual market will drive the company's specific market strategy. It is difficult for a company to create the correct internal mechanisms to support more than one market role. Therefore it is important to identify the role that matches the specific company circumstances of assets and market structure.

  1. "Market Microstructure: A Practitioner's Guide," Ananth Madhavan, Financial Analysts Journal, September/October 2002.

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