Negawatt Market-making

Abstract

Market-makers, as the term suggests, create markets. But what
does this mean exactly? In the financial world the term applies to in-
vestment bankers and stock brokers who link buyers and sellers of fi-
nancial instruments where their activities would otherwise be blocked
by barriers such as lack of knowledge of the opportunity, lack of li-
quidity, or insufficient scale for transaction efficiency. Market-makers
can also create new instruments which address specific needs—thus
we have the expanding universe of derivatives where things like in-
terest rates, currencies, and futures (of just about anything) are
swapped.
When an ESCO develops an efficiency project, it acts as a mar-
ket-maker. It identifies the opportunity, provides expertise in the
transaction, links the buyer and seller, and perhaps arranges the li-
quidity (project finance). The host site becomes the seller of some por-
tion of its future energy stream (part of the part that is to be saved).
When the utility provides an incentive, such as a rebate or a “stan-
dard offer,” it becomes a buyer of negawatts. This role may at first
seem strange. We are accustomed to thinking of the utility as the pro-
ducer and seller of watts. But with integrated resource planning and
the break-up of vertical integration, local distribution companies have
become buyers of watts. Even generators may become spot market
buyers to meet contract commitments. So the role of purchaser of
negawatts is less radical a leap than it might at first seem.
The financial resources of a major utility enable the aggregation
of a portfolio of projects. Modern finance theory tells us that a portfo-
lio reduces risk. With scale achieved and stable revenue assured, the
stream of payments against future energy can be securitized —shares
sold in a market, replenishing the utility’s invested project capital.