Despite a tumultuous environment created by rising energy prices and new laws and regulations, online energy trading in wholesale markets surged 750% from 1999 to 2000. According to a new Report by Forrester Research, Inc. (Nasdaq: FORR), online energy trading will continue this rapid growth — leaping from $400 billion in 2000 to $3.6 trillion in 2005. Three-quarters of this volume will come from the rollout of new over-the-counter financial derivatives like swaps and spreads.
“Despite last year’s turbulence, energy companies jumped on the Net bandwagon, investing in dot-com trading sites, building private eCommerce platforms, and forming industry consortia,” said Jim Walker, senior analyst at Forrester. “While Enron dominated online trade in 2000, new industry consortia like TradeSpark and IntercontinentalExchange are ramping up volume — increasing liquidity for the entire market.”
As energy companies adopt the Net, their trading style will change from art to science. In this environment, companies will supplement person-to-person negotiated deals with quantitative analysis and program trading. The speed and efficiency of online trade will also push traders to develop straight-through processing from order capture to contract settlement — enabling companies to post real-time P&Ls in this highly volatile market.
Rather than giving rise to a plethora of new venues, the majority of online trading will occur at only a few sites. By 2005, three distinct venues will form to serve different markets: one liquidity hub, three merchant platforms, and thirty solution sites. The liquidity hub will attract companies seeking to exchange price risk in pure commodities. Merchant platforms will offer industry marketmakers a venue for trading products to maximize margins from their own long-term assets and customer contracts. Finally, energy companies 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,” added 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.”
For the Report “Net Energy Hits Hypergrowth,” Forrester spoke with executives from online energy marketplaces, energy producers, industrial customers, traders, and software suppliers.