Managing Energy Risk: An Integrated View on Power and Other Energy Markets

Foreword

Around the world, liberalisation of the energy sector has changed the business model of utilities significantly. Before the liberalisation, integrated utilities were not exposed to significant financial risks. Regulated, cost-based tariffs for electricity and gas allowed utilities to pass on all costs incurred to their end customers. Liberalisation has created competition in the energy sector and end user prices have become market based instead of cost based. As a consequence, utilities’ revenues generated outside the regulated transmission and distribution business are no longer automatically in line with their costs. Competition has created both strong incentives for improving operational effciency and the need for effective risk management.

In liberalised markets, utilities are exposed to a variety of risks on the cost side as well as on the revenue side: volatile fuel (especially gas, oil, and coal) and CO₂ emission certificate prices, fluctuating wholesale electricity market prices, customers changing their supplier, and uncertain customer demand. Further risks include uncertainty in power plant availability and volatile hydro power generation, depending on river flow rates and reservoir inflows. In this environment, risk management has become a key challenge for every energy company. Liquid markets for physical and financial products for electricity, fuels, and CO₂, provide the opportunity to control and manage risks, but can also create additional risks including ...