Credit in the Energy Markets

Craig Enochs

Energy markets, once regional, are now interconnected in a global web. As energy markets grow and mature, standardisation is increasingly the norm to reduce industry risk, whether in operational procedures or contractual documentation. However, credit risk is a lingering problem and the mitigation of credit risk continues to be a focus of the energy commodity markets. High-profile bankruptcies of creditworthy entities and the need to do business with strategic counterparties that are not creditworthy combine to create an environment without a perfect credit solution or way to completely eliminate credit risk. As the energy markets have evolved, the credit tools used by market participants have likewise evolved, and this evolution is reflected in the migration to the International Swaps and Derivatives Association (ISDA) Master Agreement (“ISDA Master Agreement”) and the ever-expanding roster of potential credit risk reduction measures.

This chapter will address the evolution of credit in the energy markets, credit risks that still exist, credit tools used in the energy markets and the migration of energy market participants to the ISDA Master Agreement.

EVOLUTION OF CREDIT IN

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