In the fast-paced world of energy trading, where volatility is the norm and complexity reigns, the need for effective tools to manage risks and optimize trading strategies has never been greater. As the share of renewables dramatically increases, wholesale market participants are challenged by the different risk profiles of those assets, in particular balancing risk in addition to price risk, given their unpredictability. To succeed, energy companies need to identify and capture opportunities quickly and at the lowest cost. Energy Trading and Risk Management (ETRM) systems have been the backbone of energy trading operations, however, in this environment, the traditional ETRM solution is falling short to unlock value from their increasingly complex energy portfolios.
The Evolution and Promise of ETRM Systems
ETRM systems have evolved since their beginnings as custom software solutions developed internally by trading houses. These early solutions focused first on providing the ability to record trades (initially just financial instruments, then expanded to physical trades), and then further expanded to provide a framework for capturing the full transactional life cycle through financial settlement. They were introduced as game-changers, promising to automate trading processes, improve risk management capabilities, streamline operations, reduce manual errors, and enhance decision-making through real-time data analysis and modeling.
The Reality Check
Despite their initial promise, ETRM systems have faced criticism in recent years for falling short of expectations. Industry surveys reveal that many energy companies still struggle to fully automate their trading processes, while volatility and complexity in production, planning, and trading continue to escalate.
Managing a portfolio of demand- and supply-side resources is complex. With more renewable generation and changing load patterns, wholesale market participants are challenged by the complexity of effectively forecasting demand and resource availability while managing their positions, mitigating exposure to market risk, complying with regulations, and meeting financial targets.
This involves not only hedging financially with instruments such as futures, options as swaps but also with physical assets. The complexity here is that cost savings or increased revenues depend on variables such as location, market prices, demand, or generation type. While optimization with nuclear, coal, and hydro lent itself to cost reductions, today, with unpredictable renewables and battery storage, optimization is much more compelling for seizing market opportunities or operating more effectively. Additionally, there are new waters to navigate, such as the social impact of the energy transition.
Meeting the Challenges Beyond ETRM
By recognizing the limitations of traditional ETRM systems and addressing these challenges, energy companies are exploring innovative solutions and approaches. Energy Portfolio Management is essential to operating reliably, affordably, and responsibly in this dynamic environment.
Considering the broad scope, Energy Portfolio Management is an interplay between market insights (from market pricing to generator attributes to transmission data), forecasting (load, production, or price), asset modelling (projected performance in the future), asset optimization (lowest cost dispatch), energy trading and risk management to maximize value and mitigate risk, optimal bidding/offering through market communications, and managing compliance reporting. It necessitates specialist functionality for operational analytics (planning), finance, and risk (commercial operations for forecasting, market communication, and trading) through a composable solution approach delivered as a service or software.
When integrated, it provides a holistic view that creates transparency, knowledge, and awareness, enabling planners, portfolio managers, traders, and investors to make better economic and strategic decisions and support effective business operations.
Additionally, automating processes and decisions simplifies and streamlines compliance both internally and externally, reducing costs and risks. This positions energy companies to not only address the challenges of the present but also navigate the complexities of the future energy landscape with agility and resilience.
The Path Forward
In the face of mounting challenges and evolving market dynamics, the traditional ETRM solution is falling short of navigating this on its own. Successful and innovative companies constantly evaluate markets to understand the effects of tightening regulations, resource constraints, market volatility, and environmental pressures. It's crucial to operate in a competitive market. Equally important are the right insights, economically or technically, to take advantage of market opportunities and risks, from future grid constraints to curtailments, in an optimal way. Automating the process of the entire cycle from market intelligence to market access increases efficiencies and maximizes opportunities for energy companies, allowing them to bring assets into their trading portfolios, thereby unlocking value through improved decision-making. A Game Changer!