E-Business Applications in the Energy Sector

* With the ongoing deregulation of the energy sector worldwide, a definite need exists to manage risk and opportunity therein. Towards that end, both energy producers and consumers are becoming increasingly reliant on real-time data in order to implement successfully their strategies for operating within this decentralized environment. In contrast to the hierarchical, state-regulated paradigm of the past with its emphasis on stable rates and centralized decision-making, the newly emerging framework is dependent on the availability of real-time prices and control algorithms to transform data into managerial policies. In the Volume 5 Number 3 special issue, we feature seven papers that analyze these aspects of ebusiness in the energy sector. The first paper, “A Binomial Tree Model for Investment in Transmission Assets” by Javier Contreras, Reinaldo C. Garcia, João Batista C. Garcia, and Marco van Akkeren, explores how investment in transmission lines may be precipitated when revenues are uncertain. This is an important topic in the energy sector due to higher demand for electricity in the future, which is likely to require network expansion. Equally important is a thorough examination of how successful the deregulation experiment has been. The paper by Youngho Chang and Wai Lit Toh, “Efficiency of Generation Companies in the Deregulated Electricity Market of Singapore: Parametric and Non-Parametric Approaches,” applies both stochastic frontier and data envelopment analysis to performance measures of generation companies in Singapore and finds reasonably high efficiency levels. Implications for allocative efficiency may also be obtained via data envelopment analysis. As mentioned previously, the issue of risk management is critical in the new deregulated environment. The next two papers, “Valuation of Spark-Spread Options with Mean Reversion and Stochastic Volatility” (by Karl Magnus Maribu, Alain Galli, and Margaret Armstrong) and “MediumTerm Electricity Trading Strategies for Producers, Consumers and Retailers” (by Antonio J. Conejo, Miguel Carrión, and Raquel García-Bertrand), investigate how modeling energy prices and trading off risk with return, respectively, impact upon power plant values and the forward trading of electricity.