Energy companies should embrace trading, says report

Energy companies must embrace trading if they are to survive in the post-Enron market, said a new report by consultants PricewaterhouseCoopers (PWC).

The recommendation goes against the market trend of 2002, which saw leading US energy companies Dynegy, El Paso, American Electric Power, Aquila and others pull back from energy trading.

The report, 'Energy trading – re-establishing sound foundations', argued that many existing companies may cease to have a viable independent future unless they adapt to the changing market by committing themselves to trading, and developing a strategy for effective governance and active risk management.“Despite the uncertainty that surrounds it, the case for energy trading is unchanged,” said Fred Cohen, New York-based global energy risk management leader at PWC, in the report. “Companies need to ensure that they have the strategy, skills and knowledge to integrate trading into their core business if they want to prosper.”PWC estimates the global energy trading market to be worth about $700 billion. But the lack of investor confidence and collapse in credit quality has led many companies to underestimate the value of energy trading, and especially its potential to build stakeholder value, PWC said.The report identifies four critical challenges for companies with energy trading operations: evaluating and managing price risk, volume risk, capital adequacy and credit risk. Many companies are still failing to adequately manage these risks, it said.Companies should merge their existing experience of energy markets with new skills learned from the financial trading world. Alliances between energy companies and financial banking organisations may be a viable option, the report said.