Taking care of risky business: Credit risk management in spot markets

摘要

As deregulation progresses, multilat-eral spot markets are becoming firmly established as the predominant model for spot trading of electricity. Most multilateral spot markets use a participant-backed risk pool to underwrite all trading. As a result, the default of a market participant impacts all other participants, and may even affect the ongoing viability of the market operator. In order to minimize the occurrence and severity of such events, all spot markets have prudential processes in place for the management of credit risk. However, the processes currently implemented by many spot markets are not sufficient to manage the risks inherent in highly volatile markets such as electricity―a fact clearly evidenced by credit defaults in California and other markets. With better credit risk management the impact of these defaults could have been reduced or avoided. While the prudential processes adopted by spot markets differ, this paper discusses a number of frequently observed deficiencies, and practical solutions for addressing them.