As the first year of the new century comes to a close the energy market finds itself in a transitional phase of development. The year will be largely remembered for two words: competition and Internet. Competition, through government deregulation and privatisation, has started to reshape the global energy market and expand its application into emissions, weather and broadband services. Market competition has forced companies to consider economies of scale through mergers and acquisitions, leading to increasing consolidation and the first stages of energy convergence.
In the year to come the full impact of market competition will become more apparent. The European Union Commission, buoyed by the impact of its electricity directive on market prices, is likely to push for full competition in both the gas and electricity sectors. Currently around 65 per cent of electricity and 45 per cent of gas markets are deemed to be effectively competitive. In contrast, California’s experience of electricity market competition has left a sour taste in the consumer’s mouth. Escalating prices for the third successive summer were the straw that broke the camel’s back. Consumer organisations are now calling for the market to be re-regulated and the impact on the screwed up US market could be significant.
But if competition has been a tale of two continents, the Internet story has been universal. In the twelve months since Enron launched its online trading platform, EnronOnline, there has been a plethora of new energy e-commerce platforms launched. In addition to the new, predominantly US-based, trading platforms such as Red Meteor, Trade Spark and Intercontinental Exchange there has been development of electronic procurement, retail and wholesale platforms in both the US and Europe. And over the next few years there will be growth in the under-developed electronic functions of services and enablers.
The success of EnronOnline is beyond any dispute. It surpassed $50 billion in commodity transactions in June and has been growing strongly since with increasing products and geographic locations. It has also extended its market reach by entering into an agreement with Houston Street Exchange, which now lists Enron’s prices, thereby extending its market reach. The other potential success is the Intercontinental Exchange, which is backed by the likes of Morgan Stanley Dean Witter, Goldman Sachs as well as leading oil companies and electric utilities. And next year New York Mercantile Exchange will roll out its own OTC Internet trading platform, enymex.
The list of new trading platforms may appear endless and in theory should be buoyed by strong growth in energy demand and increasing Internet usage, particularly outside North America. But for these platforms to be ultimately successful they will require liquidity, and to generate this liquidity will require both funding and market validity.
Funding has been a major issue during the past year as a succession of dotcom companies in all business sectors failed to realise their full market potential. Venture capital has become increasingly scarce and those e-energy platforms that had designs on being neutral platforms have been forced to seek direct investment from energy companies. The result is that there are no purely neutral e-energy platforms and a new market in e-energy platform portfolios has evolved with the likes of Williams and BP Amoco investing in new platforms and in effect creating a new hedge portfolio. The prognosis for funding next year may be no better. As the year draws to a close there has been a bear run on the tech stocks, particularly on New York’s Nasdaq.
Market validity has also been an essential factor in the success of e-energy platforms. It has certainly been of benefit to EnronOnline, which has drawn on its strong brand awareness, and will likely to a significant contributor to the expected success of Intercontinental Exchange based on its high profile participants. Part of the attraction of seeking investment by energy companies has been to buoy market validity as well as to increase liquidity by entering into an agreement with the investor to the platform.
In just over a year into the energy e-commerce revolution some directional changes are already being seen. According to a report by Forester Research there will be a split between energy e-commerce platforms purely focussing on commodity trading and those focussing on risk management solutions. The rationale behind this view is that platforms such as EnronOnline and Intercontinental Exchange will quickly assume market dominance and other platforms will have to address different e-propositions. One such proposition is risk management, which is already being addressed by Altra Energy Technologies which, through a venture with Southern Company, has developed a new trading and risk analysis system.
Next year there will be a further addition to the e-commerce revolution: clearing. During the first quarter of next year Bank of New York, in partnership with brokerages Amerex and Prebon, will launch Energy Clear, a clearing service for the over the counter energy markets. Also being launched is an alternative platform: Next Clear. Others are set to follow. The precedent has already been set for clearing OTC contracts with 90 per cent of bilateral electricity contracts in Scandinavia cleared.
At the end of a year of transition, next year will be a year of fundamental change both in terms of the underlying market structure and electronic commerce applications. As energy demand and Internet usage increases, the underlying utility market will continue to consolidate as increasing competition drives the need for increased market share and economies of scale in operation. The creation of a global convergent energy market dominated by a group of international energy corporations is already in the making. And at some point in the future the fragmentation of electronic energy platforms – whether they be trading, risk management or procurement – will cease and consolidation will commence. For this reason the next twelve months will be pivotal in shaping the future of energy e-commerce.