Creation and Transfer of Price Risk in European Energy Markets

Abstract

The impact of high energy prices on world economies is due to a risky environment that has been in place for several decades.

In this article we try to explain the nature of this environment, by assessing a broad identification of risk in an entire economic system. The aim is to perform the kind of extended risk mapping commonly done for enterprises in order to better understand why, where, and how risk is generated, how it is transferred among agents and transformed, and who ultimately bears such risk.

Topics include the creation of price risk, the ways such a risk is transferred both contractually and financially. The impact of policy and regulation is discussed. Many real examples from energy markets (oil, natural gas, electricity) are introduced in order to support the theoretical discussion.

Keywords: Price risk, Energy prices, Crude oil, Natural gas, Coal, Electricity, intra-fuel competition, Refining margins, Decoupling, Oil-indexed prices, UK gas, Benchmarks, Energy Exchanges, Commoditization, Financialization, J.K. Arrow, Emission trading, regulatory risk

JEL Classification: Q43