Clara Poletti WHITHER IPEX IN RISKY TIMES December

Clara Poletti WHITHER IPEX IN RISKY TIMES? December 7 th 2007 1

The “creation” of risk? (1) n Electricity markets’ liberalization and restructuring poses new challenges for risk management However n § § the electricity sector was not free of risk before the liberalization process started. E. g. fuel costs’ volatility; risks related locational decisions; risks related to customers’ default; quantity risks in the retail activity. Those risks had either a natural insurance from vertical integration (e. g. quantity risk), or where covered by a cost of service kind of regulation 2

The “creation” of risk? (2) n n n market restructuring has broken the natural insurance provided by vertical integration and the costs coverage guarantee Therefore it has changed the allocation of risks between operators…… In principle, the market should bring to a more efficient allocation of risk to the undertakings that are better equipped to manage it and are willing to do so 3

The “creation” of risk? (3) “Efficient allocation of financial risks among generators, utilities and other retailers, and customers is essential for recovering low costs of capital, sustaining investments to meet continued growth of demand, and eliciting demand-side usage. ” Chao, Oren, Wilson 2005 4

Conclusions n In liberalized electricity markets there possibily is a more efficient allocation of risk; n However the risk management activities can be very costly n Risk management issues must be integrated into the policy debate, expecially with reference to market design and regulation 5