3. El origen del seguro de impago de alquileres
4.2. Defensa jurídica
While a core issue of the SAF reform project was to establish a spot market and a futures market as the main organized markets for trading energy, the electricity futures market represented a rather exotic idea. There were at the time no other Norwegian commodity futures markets59, nor were there any futures markets for electricity in any other country. The Norwegian electricity sector thus had limited experience on the functions and working of a futures market. As such one role of our initial work on the subject vis-à-vis the industry was also to motivate and describe how a futures market for electricity presumably could be a tool for risk management. A more fundamental issue was related to the potential of achieving a viable futures market for electricity in the Norway, given the characteristics of the commodity, the inherent risk and uncertainty of the spot market, and the new market structure. Section 3.1.1 briefly comments on the fundamentals of risk in the Norwegian electricity market, the need of efficient risk management, and the role of a futures market for electricity. Section 3.1.2 discusses the suitability of electricity as a commodity for futures trading
3.1.1 Risk in the Electricity Market, and the Role of an Electricity Futures Market
The transition to market-based trade in electricity with an organized spot market contributed to a more pronounced visualization of the inherent price uncertainty of the market. Electricity spot prices vary stochastically within the day, within the week, within seasons, and from year to year, however, with recognizable daily, weekly, and seasonal patterns. The uncertainty of spot prices follows from the stochastics of the underlying fundamental demand and supply factors. Important fundamentals of demand are, for example, temperature, the price of other fuels, business cycles, etc. As to the supply of electricity, the most important factor in a pure hydro-power system is the availability of energy, i.e. the supply of water60. At any point of
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The listed futures and options market in Norway started in 1990, in which the first traded derivatives where stock options, and options on the OBX stock index. Trading in financial futures was, however, at the time prohibited. In May 1992, the Ministry of Finance granted permission to commence futures trading at the exchange. Futures on the OBX were then introduced in September 1992, and Government bond futures were introduced in June 1993. (Source: Battley, N. ed. (1993) The World’s
Futures & Options Markets, Probus Publishing Company, Cambridge, England.)
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The importance of the water supply was early accentuated as in Hveding (1968): ‘In a predominantly hydro power system it is still necessary for the planning to provide sufficient total plant capacity to meet the peak load, just as in the thermal system. But in addition, the hydro system presents also an energy problem, which tends to be the overriding one, thus making planning considerably more complex than that of the thermal system. Whereas fuel for thermal plants can be bought as required, water supply to a hydro plant cannot be controlled except by storage, carrying water over from the surplus period to deficit periods. Once drawn down, the storage cannot be replenished except by the run-off that may or may not occur. The larger the storage volume is, the
time the available amount of water is given by the reservoir levels and the inflow of water, the latter which follows from precipitation and snow-melting. The inflow of water, which depends on temperature and weather, is stochastic, and varies greatly from year to year, as well as within each year. An important challenge of the hydro-power producer is to plan the inter-temporal allocation of water. This involves estimating when the value of using the available water is the highest. Here the market expectations of future inflow and future demand conditions are important factors that affect spot prices.
For the participants in the electricity market uncertainty is manifested in price risk and quantity risk:
- Price risk refers to the volatility and uncertainty of spot prices facing the producers, traders, and end consumers in the future. For hydro-power producers price risk refers to uncertain selling prices for their production. For end-users price risk refers to uncertain buying prices for electricity. The price risk exposure of traders, who are middlemen, follows from the uncertainty of the price margins of their net trading position.
- Quantity risk arises due to the hydro-power producer’s stochastic inflow of water, and the stochastic demand for electricity.
In a highly volatile market risk-averse participants would consider to hedge against uncertainty in accordance with their risk preferences. A futures market offers the possibility of hedging price risk. Price hedgers, such as buyers and sellers of the commodity, will thus be the main group of traders in the futures market. Normally, however, there will be an imbalance between hedging motivated purchases and sales. Here, trading by risk-taking participants without positions in the underlying commodity play an important role in balancing the market and contributing to an efficient allocation and pricing of risk. The main motives of participants in the futures market may thus be categorized either as
i) hedging motives, where producers or consumers of electricity enter futures positions to reduce the price risk associated with the future price movements of their underlying positions, or as
ii) speculative motives, where the main motive is to profit from future movements in price, and where the futures position does not match any underlying commodity position. The speculator is thus a trader who enters the futures market in pursuit of profit, but who as such has to accept risk in the endeavor.
better are the chances that the problem will be mastered at all times, but there is always a certain risk that deficiencies may occur’.
In addition to providing an efficient instrument for hedging price risk, it should also be acknowledged that a liquid and well-functioning futures market may contribute to the overall efficiency of a market by fulfilling several roles:
Risk allocation: The futures market provides hedging facilities. Relative to a market purely based on bilateral contracts, a well-functioning futures market provides flexibility and enables a dynamic risk management. Even more important is that the futures market provides a market-based pricing of risk, and efficiently allocates risks in accordance with the risk preferences of the market participants.
Informational role: In contrast to a bilaterally negotiated price, which only reflects information held by the negotiating parties, the market-based futures price reflects an aggregate of the information held in the market61.
Co-ordinational role: Closely linked to the informational role is the implied co- ordinational role of the futures market in the hydro-power electricity market. In a hydro-power dominated market, where the variable production costs to a large extent follow from the alternative cost of using water, the market participants’ expectations of future spot prices play an important role in their inter-temporal allocation of resources. In this, futures prices contribute to align expectations, and thus to aid the co-ordination of production decisions in the market.
With a highly volatile electricity spot market and with risk averse participants, the need of an efficient instrument for risk-allocation was evident. The establishment of a futures market represented an obvious candidate for organizing this function. A basic question was, however, whether electricity would prove a suitable commodity for futures trading.
3.1.2 Is Electricity a Suitable Commodity for Futures Trading?
Although efforts were underway in other countries, the development of futures markets for electricity was at the time still a new phenomenon, and there was limited experience to draw on. A basic question was whether electricity as a commodity would be suitable for futures trading. That is, whether it was possible, and probable, that a liquid well-functioning futures market for electricity could evolve. Experience with commodities successfully traded on other futures markets indicated that the following characteristics were common to these
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The degree of the informational contribution of the futures market also depends upon the chosen trading mechanisms. For example, if based on an open auction format, the futures market may in principle to a larger extent contribute to increased transparency and dissemination of market information, than if based on a closed auction format.
commodities: i) product homogeneity, ii) storability, iii) deliverability, iv) the existence of a viable spot market, v) price variability, and vi) the existence of speculators to take up the balance of open positions. Though these characteristics are by no means neither necessary nor sufficient conditions for the success of a commodity for futures trading62, they provided a certain guideline for assessing the suitability of electricity for futures trading. Electricity is a commodity which is physically homogeneous, and where reasonable requirements of standardization may be met. It is subject to delivery and indirectly storable through the storage of water or fuels. Furthermore, price uncertainty as manifested in stochastic spot prices, was considered a major concern for market participants. Thus given that a well- functioning spot market was in the process of developing, the establishment of a futures market for electricity seemed a viable proposition. However, while these characteristics at best can give an indication of the suitability of a commodity for futures trading, the ultimate success depends on a number of other factors. Here futures contract design and the institutional arrangements for trading the contract are of crucial importance.