Online energy trading will reach $3.6 trillion in 2005, fueled primarily by the growth of financial derivatives, according to a new report by Forrester Research. The report predicts several newcomers eventually will catch up to EnronOnline (EOL), the clear e-commerce leader in 2000, but several other independent exchanges could become casualties in the next few years.

Total online energy trading grew 750% in 2000 and reached $400 billion, led by EOL, noted Forrester’s Jim Walker, author of the report “Net Energy Hits Hypergrowth.” Enron CEO Ken Lay said two weeks ago that the company’s electronic trading platform had done $500 billion in business since going live in November 1999. Walker noted that other sites, such as TradeSpark and IntercontinentalExchange (ICE), face a tough road ahead in attempting to gain volume with EOL hoarding a large portion of the business.

“In the near-term it is going to be very hard to catch up with Enron because they have a commanding lead,” said Walker. “But in my view, over the forecasted period to 2005 there is time for ICE and TradeSpark to catch up. Enron will continue to be a major player, but it won’t be the only player to dominate the market as it did last year.”

Not only do sites such as ICE and TradeSpark have to divide transactions among themselves, but they must also span thousands of products at hundreds of delivery points, the report stated. Yet some of the platforms continue to post strong volume increases.

ICE recently announced that it set a weekly volume trading record of more than 370 Bcf of natural gas for the week ending April 6 (see Daily GPI, April 11). The company previously announced that it had broken a single-day record on April 4, with more than 97 Bcf of natural gas traded on its system. On March 22, ICE announced that its platform notched another single day record on its power exchange, trading 4 million MWh in power (see Daily GPI, March 26).

TradeSpark has also been seeing an upswing in volume. The company reported last Tuesday that it had a 56% increase in its overall trading volume and a 90% increase in natural gas trading volumes during the first quarter 2001 over the fourth quarter 2000 (see Daily GPI, April 11).

Walker said there will be three phases of transition to a new online market order, confrontation, resolution and fortification. During the confrontation period (2001-2002), the Forrester report said sites like enymex and ICE will “race to erect sustainable businesses,” while energy companies such as Dynegy will refocus their trading and reposition their private sites to capture customer sales. Stand-alone energy companies will likely drop their own site and join with a consortia. The report forecasts that independent sites like Altra Energy Technologies and HoustonStreet.com will become casualties of this period, being forced to sell their exchanges and redirect their efforts to providing other energy firms with platforms for services such as physical scheduling and balancing.

The resolution period (2003-2004) is when the report says the major energy players will establish their market positions. Nymex will transition current members to enymex and encourage vendors such as Bloomberg to build portals to the trading site. EOL during this period will continue to innovate new products, the report stated.

From 2004-2005, the fortification period will see the new market structure stabilize as participants begin to focus on the products and services that their marketmakers know best. Going forward, Walker believes there will be one hub, three merchant platforms, and as about 30 other solution sights constituting the online energy market. “As a result, enymex will emerge as the liquidity hub, while ICE, TradeSpark and Enron will split merchant trading,” the report stated. “These merchant platforms will make up almost two-thirds of the industry’s total online trade.”

“The big winner in the liquidity hub will be enymex,” said Walker. “That is because they have the central clearing and settlement that they can bring to the market. They can bring the integrity that is needed for a market that is exchanging price risk. In the merchant platforms, there is no question that Enron is going to remain a key player, but the two consortia — TradeSpark and ICE — have the opportunity with their marketmakers that are behind them to carve out their own place in the market. Then there won’t be very much room for anyone else.”

To acquire a copy of the full Forrester report, visit the company’s web site at www.forrester.com.

©Copyright 2001 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.