2009 Think Corner

The Future Landscape of Energy Trading
Michelle M. Foss, Lee-Ken Choo, Gürcan Gülen & Bhamy Shenoy - June 2009

Who trades energy commodity derivatives and why do they trade? These seemingly simple questions beg answers as we continue to research and analyze energy commodity market performance during the past few years. Essential drivers of crude oil and natural gas spot and futures prices reflect current and expected conditions in supply–demand balances and associated inventory levels, as well as key basis differentials related to shifting geographies and distances (location of supply sources relative to demand and changes in demand), variations in quality and so on. Increasingly, price levels of energy commodities reflect other variables such as the relative value of currencies (the dollar against other denominations) and returns derived in other financial markets (equities, bonds and other interest bearing instruments), cognizant of inflation expectations. Finally, the question of “who trades” raises the issue of speculation, and whether some market participants are engaging in side bets and/or whether energy commodities markets are attracting participants that have no vested interest in the physical commodities businesses. That is, are there market participants seeking returns from energy commodity derivatives purely for gains in financial portfolios? If so (and the answer is certainly “yes”) what are the consequences...

REC Trading in Texas - Lessons Learned and Way Forward
Gürcan Gülen & Ruzanna Makaryan - June 2009

More than half of the states in the U.S. (as of May 2009) have been supporting the expansion of renewable energy via mandates or requirements, known as Renewables Portfolio Standard (RPS). Currently, the U.S. Congress is working on a federal version with several bills under discussion. Existing state-level mandatory RPS programs are estimated to cover 46% of total electricity sales in the U.S. (programs announced by the end of 2007). About 60 gigawatts (GW) of new renewable capacity is needed by 2025 to comply with the mandates. This requirement translates into an estimated 4.7% of total U.S. sales in 2025, and 15% of demand growth between 2007 and 2025...