This paper discusses key issues and challenges that energy suppliers face in the deregulated energy markets. The approach taken in this paper takes the perspective of an energy supply firm. First, a discussion on the asset risks faced by energy suppliers in more uncertain deregulated energy markets is presented. Second, an examination of some of the reasons why available capacities tend to be underestimated in many supply forecasts. Finally, some of the implications of uncertainties in supply forecasts on the firm's strategy are evaluated. The key conclusions of our research presented in this paper are: 1. Financial risks associated with energy supply assets have increased in the recent past with the deregulation of energy markets and the resulting commoditisation of energy products. 2. The difficulty in estimating the extent of oil and gas resources has less to do with forecasting methods than assumptions based on incomplete and less reliable information. The tendency to underestimate oil and gas supplies results more from the difficulty in assessing existing capacity than new greenfield capacities. 3. While electric power systems are different from oil and gas fields, power supply forecasts seem to have similar difficulties in estimating future supply capacity as in oil and gas. As in oil and gas, a number of power supply forecasts have predicted capacity shortages based on the assumed relationships between current prices and the cost of adding future capacity. Experience shows that such assumptions are unreliable because of the declining cost of incremental capacity over time. 4. Firms cannot predict the market future but can help shape it. The ability to react to changing supply conditions is a critical competitive advantage. International experiences in managing energy supply firms show that the ability to react depends on implementing business systems, information processing, commercial risk management and management structures that facilitate timely decision-making.
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