Credit Risk in Power and Gas Markets

Ellen Lapson and Denise Furey

An experiment in competitive natural-gas and electricity markets captured global attention with privatisations in Britain and in Chile in the late 1980s to early 1990s. Innovations from Britain, Scandinavia and Chile spread to Argentina, Brazil, Australia and North America. European restructuring is advancing under the directives of the European Union, while there have been fewer changes in Asia. Some of these early experiments resulted in improved service for consumers and commercial success, but by now it is evident that small flaws in the restructuring of essential public services can produce financial calamity. The restructured power and gas markets provide cautionary lessons about the relationship between credit risk and market structure.

Prior to restructuring, state-owned or privately owned monopoly providers controlled the electricity and gas sectors in most nations. When wholesale power and gas trading occurred, it took place under agreements among substantial utilities or government agencies. With liberalisation and restructuring, competitive providers have gained the right to sell energy in a relatively open market either to network utilities or directly to consumers