CommodityMarketDevelopments:
Top10ITdevelopmentsfortheenergysector
The banking/credit crisis that began in 2007 has certainly changed the economic and capital markets
landscape,thefullconsequencesofwhichareyettobefullyseenandunderstood.Theglobalpowerindustry
isfeelingtheeffects...andwillcontinuetofeelthemforsometime.Evenbeforethecrisis,utilitieshadbeen
challenged by increasing labour costs, an aging labourforce, increased infrastructure costs and volatile
materialcosts.Thecommoditymarkets,andbroaderenergyindustryinparticular,werealreadyexperiencing
significant industry change and continue to undergo major industry volatility, both in terms of price,
participants, market structures and vacillating regulatory developments. The impact on investments and
prioritieswillbesignificantforsomeyears.
By Paul Mahady
I
t is helpful to examine ten major areas of developments required short and intermediate-term to meet demand,
and review what has changed in the last few years and environmental constraints and public policy may aggregate
whatislikelytounfoldintheyearstocome.Wehaveseen greater use of coal and nuclear while production capacity for
continued changes in the energy landscape. Some are oilisincreasinglyconcentratedatnationaloilcompanieswho
markedlydifferentthanpriorperiodsduetothebankingcrisis, do not necessarily have the desire or investment approach to
while others are accelerating or expanding upon previous increaseproduction.
developmentsindependentofthebankingcrisis. Theresultofpublicpolicyandregulatorydevelopmentsare
These include; increasing national interests and likelytocontributetomorepricevolatility.
governmentscontrollingthesupplyofsomeenergysectorsand
expanding this approach to other energy products such as 3. Energy as a Bona Fide Asset Class
natural gas; conflicted regulatory developments at national In the latest energy price boom to bust cycle, energy and
and regional levels, especially in the EU; environmental broadercommoditiesbecamewellestablishedasanassetclass
constraints on expanding energy supplies, to climate control for investors – from retail to institutional to alternative
legislation and trading products; and exchange activity investment vehicles. This has exacerbated the underlying
expansion into energy products globally especially OTC demand/supplygapsandgivenaninherentbullishbiastothe
products. There has been a whirlwind of activity, creating market. It has also impacted the speed at which the market
additionaluncertaintyandopportunity. moves. Exchange Traded Funds (ETFs) and other products
Below are ten energy market IT related trends with special facilitating retail participation in a different way from past
emphasis on Independent Software Vendors (ISVs) servicing commodity fund structures are distorting historical market
thisverticalindustry. relationships.Thisislikelytocontinuewithnewpricecyclesin
energy. In retail investments, ETFs have been created for
1. Climate Control Initiatives individual investors to trade, with the advantage of being
AnewDemocraticadministrationandlegislaturewithrecent exchangelisted.ETFshavephysicalsorfutures/optionsbehind
favourablejudicialoutcomesinsuresthatTheUSwilladvance the financial instrument creating real demand in the market
climate control initiatives. Addressing global climate change for the underlying commodity. While hedge funds have been
has become a global initiative and the US engagement will significant participants at this time, in the next cycle retail
renew European efforts as well, albeit at a difficult economic participation may be even greater with the broader range of
juncture. The increased focus on renewables (including productsavailable.
biofuels) and more efficient carbon markets will spur carbon Energy as a bona fide asset class will contribute to volatility
management technology development. Carbon capture and andpriceovershootingoneconomicrecovery.
storage developments will be key going forward given limited
reliable short and intermediate-term alternatives to fossil fuel 4. Exchange & OTC Markets Developments
sources.Theresultwillbearenewedfocusonemissionstrading. The banking crisis has accelerated the convergence of
exchange and OTC markets with regards to clearance and
2. Public Policy & Regulatory Developments settlement. Major exchanges are all establishing positions in
Utilities primarily will be extraordinarily challenged with commodities and energy with CME Group acquiring NYMEX,
capital constraints. At the same time capital spending will be IntercontinentalExchange (ICE) expansion and acquisition,
requiredfornewtransmissionanddistribution,forrenewables NYBOT with additional clearing capability, and TSX Group
and refitting. There is a significant risk that legislation and leveraging the NGX acquisition (and follow-on NTP
publicpolicyinitiativeswillgetaheadofindustrycapabilities acquisition). New exchanges are developing in Asia as well,
and resources to meet the regulatory requirements and focusingsignificantlyoncommoditiesandenergyproducts.
customerneedscosteffectively.Whileallenergysourceswillbe Major equity exchanges have yet to fully exploit the
72 worldPower2009
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