Study: Online Energy Trading Surges

Although the current energy crunch has caused prices to surge and spurred a complex web of new laws and regulations, a report released Tuesday by Forrester Research found that online energy trading in wholesale markets continues to make “rapid growth,” mushrooming 750 percent from 1999 to 2000.

“Despite last year’s turbulence, energy companies jumped on the Net bandwagon, investing in dot-com trading sites, building private e-commerce platforms, and forming industry consortia,” said Forrester senior analyst Jim Walker.

As more energy firms begin designing blueprints for their Internet strategy, their trading strategy will evolve as well, Forrester said. For instance, companies will be able to augment person-to-person negotiated deals with quantitative analysis and program trading.

In addition, the speed and efficiency of online trading will push traders to end-to-end processing from order capture to final contract settlement, thereby allowing companies to post real-time profits and losses in the highly volatile energy market.

Market Leaders

With over $101 billion in revenue last year from its electricity, natural gas and communications companies, Enron dominated online energy trading in 2000, according to the research firm.

However, the study said that the Houston, Texas-based company is likely to face heightened competition from new industry consortia such as TradeSpark and IntercontinentalExchange, both of which have ramped up their volume and are helping to increase liquidity for the entire market.

Rather than giving rise to a batch of new ventures, the majority of online trading will occur at only a few sites, the study predicted.

Future Format

Forrester said that three distinct venues will form to serve different markets by 2005:

• a liquidity hub, which will attract companies seeking to exchange price risk in pure commodities
• merchant platforms, which will offer industry leaders a venue for trading products while maximizing margins from their own long-term assets and customer contracts, and
• energy companies, which will offer branded solution sites to structure special deals and provide customized services for their wholesale customers.

“We expect Enymex to win out as the liquidity hub, leveraging the strength of its offline trading infrastructure and institutional trading community,” said Walker. “The leaders of the merchant hubs will be Enron, ICE and TradeSpark — supported by traders willing to make markets and act as specialists for specific products.”

To compile information for its report, “Net Energy Hits Hypergrowth,” Forrester interviewed executives from online energy marketplaces, energy producers, industrial customers, traders and software suppliers.