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A New World of Risks

A new set of skills and expertise will be necessary to deal with the risks created by new government mandates, new market developments, and new energy technologies.

Fortnightly Magazine - April 2007

(price and volume of output).

Meanwhile, the Structure Group’s Ryan finds that “in today’s competitive markets, generators are constantly seeking to reduce costs by various means, including savvy fuel purchases, better risk management, more efficient operations, and fewer, but more productive, maintenance outages.”

Building a Better Market

Many experts believe the best way to meet the greater complexity and consequent risks utilities will face is to have more efficient and more liquid markets. That result can be achieved by continued rationalization or improvement of the way the market is run.

For example, Bob Levin, senior vice president of research at the New York Mercantile Exchange, is calling for the decoupling of the market from the grid manager.

“We’ve seen that the cash market by being part of an [independent system operator] is subject to the same governance as the ISO, and we believe we have seen the hampering of innovation and growth in those market mechanisms. So, we haven’t seen a lot of advancement there and we have seen some of the ISOs struggle as they try to introduce advancement,” he says, adding that he is skeptical that they will be able to produce innovation. “The idea of separating those functions makes sense,” he says.

“There’s inertia there. As long as you are talking about markets that are under the auspices of the ISO, they are going to change at the pace that ISOs processes change, and that’s slow,” he says.

Levin believes that if the cash market were allowed to evolve more naturally, it not only would offer innovation in that market, but also would result in more financial market solutions for risk management.

Similarly, New Energy Associates’ Mike Muse finds a need for the RTOs to become more standardized in their business practices.

“What needs to be standardized is the market approach. If you look at how the RTO in ERCOT functions, they have a huge Web site where you can read about all the different rules and how they set prices, for example. These are business standards. The cost of building a solution (whether internal or third party) goes up dramatically because of the lack of standardized business processes,” he says.

Muse says many of the markets like PJM and MISO will have similarities, as they have made efforts to standardize, but they are dramatically different from an ERCOT and [the California] ISO.

“Now you see ERCOT moving to an LMP model, and that’s a good indicator, but there are still vast differences between them,” Muse says. Astutely, Muse captures the reason why creating a common market and rational risk-management techniques for a new era is difficult. The reason for the continued differences in RTOs is partly due to “the actual grid and the actual assets on the ground,” and partly “because different people were responsible for starting different markets.”

Putting it another way, the comic-strip character Pogo would say: “We have met the enemy, and he is us.”