Clara Poletti
WHITHER IPEX IN RISKY TIMES?
December 7th 2007
IEFE - UNIVERSITÀ COMMERCIALE
LUIGI BOCCONI
1
The “creation” of risk? (1)

Electricity markets’ liberalization and restructuring
poses new challenges for risk management
However



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)



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

In liberalized electricity markets there possibily is a more
efficient allocation of risk;

However the risk management activities can be very
costly

Risk management issues must be integrated into the
policy debate, expecially with reference to market design
and regulation
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