Parsing your Portfolio for Profitability

Post by admin on August 17, 2016


In the low-margin business of a retail energy supplier, the timely procurement of sufficient wholesale supply at the best possible price and risk level is critical to its profitability.  To answer fundamental questions about supply & demand, portfolio performance, valuations, and profit & loss, requires an integrated system that handles the business processes from supply contracts to settlement, and where the retail sales book is linked to the wholesale sourcing book to facilitate in-depth monitoring and assessment of positions and exposures. Are you able to Parse your Portfolio for Profitability?

The wholesale price of electricity and gas can fluctuate significantly due to multiple factors such as the weather, economic conditions, plant or transportation availability and the competitive environment. Retail energy suppliers will closely watch the opportunities and threats that affect current and future customer deliveries. At the same time, your customer-base may increase, decrease or perform differently than was forecasted.

All recognizable for the portfolio manager, who needs to manage this process to secure reasonable margins within the company risk limits. However, they are often left to systems that are incapable of providing real-time information.  These systems also take considerable time and effort to manually consolidate data and get the insights and answers on portfolio positions and performance.

A state-of-the-art integrated Energy Trading and Risk Management (ETRM) system is crucial for effective portfolio management. This starts with a flexible multi-level book structure where your portfolio strategy can be captured. This then enables the level of reporting granularity required to assess and analyze volume and price exposures. For example, by wholesale or retail book, commodity, customer and contract type.

Furthermore, production assets, sourcing agreements as well as large customer contracts can be configured. Each can be configured with their own commercial parameters, pricing rules and settlement terms. To enable valuation of contracts and perform risk reporting, multiple market price feeds can be set up, as well as company specific custom curves.

Time-series functionality will accommodate the import of historical and actual consumption data to support the integrated load forecasting function for aggregated and individual customers. It will also accommodate project production outputs, feed the invoicing and settlement, and crucially allow comparison and contract performance analysis.

Being organized with all of the data in a single integrated system, workflow management allows for the implementation of company policies for limits, risk, credit and associated approvals and notifications. Such a system provides centralized control and decentralized execution. Autonomy of the portfolio manager to achieve cost savings or increase revenues, while enabling management control and staying compliant with regulations is also provided.

The best ETRM systems offer a high degree of user-configurability. The authorized user can then make changes to update the system to reflect current and on-going business operations.

With retail sales and wholesale supply contracts in place, the retail energy supplier is exposed to several risks including market price risk, volumetric risk, and shaping risk. A next-generation ETRM system provides the Portfolio Manager several tools to assess exposures. Tools such as a position threshold alert, Mark-to-Market, Value-at-Risk and Earning-at-Risk reports. ‘What-if’ analysis allows users to view such exposures under different scenarios.

In addition, linking the sales and sourcing books allows companies to see the underlying performance and profitability between retail and wholesale positions against particular price curves and set cost. Moreover, the system provides volumetric comparison analysis between forecasted values and actual values. This allows users to monitor customer groups or specific large customers’ consumption behavior against contract.

Retail energy suppliers must be on top of their game when it comes to sourcing energy supply and serving load to achieve reasonable margins in a highly competitive market with often dropping prices. Deploying next-generation technology with a state-of-the-art ETRM system will optimize operations by helping do the right things and doing those things right.

That means when managing a power and gas portfolio, the portfolio manager must be able to ‘parse’ it, i.e. to analyze and discover implications by slicing and dicing the data until arriving at the right level of detail for analysis. A single fully integrated ETRM system will help achieve this and enables managers to improve buy and sell decisions thereby increasing profitability.


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