Wholesale energy markets have never been easy and when global deregulation started over 20 years ago, energy trading became more complex giving rise to information technology solutions to address the risks with energy trading: Energy Trading and Risk Management (ETRM) systems.
It was essentially the first message that the use of ETRM systems was the prudent way to help market participants manage complex risk scenarios and effectively trade and manage energy transactions from trade capture to delivery and settlement. Following several years of economic hardship due to the 2008 global financial crises, market participants now face an environment of ever-emerging rules, the effects of renewable energy and competitive pressures.
It is with an effective ETRM system that market participants can respond to three main challenges: Increasing complexity and workload, contain operating cost, and regulatory requirements.
Energy trading companies in the European market have witnessed significant changes over recent years. The emergence of renewable electricity generation has affected market prices, discouraged long term contracts, and increased intraday trading.
As a result of the financial crisis, new regulatory reporting has changed the way companies report, track and manage their physical power and gas trading. Simultaneously, the European Union introduced several initiatives towards a fully integrated internal European market with harmonized rules. This may increase cross border trading and introduce new opportunities for market participants.
In this environment, trading, operational and risk management staff, need to have the access to and insight in the information about their business. At the same time, back office and compliance management require the ability to report each contract and settle every cent. Streamlining those operations is crucial to get real-time visibility of positions and risks to enable decision-making and control the business.
Non-integrated spreadsheets, isolated home-grown applications or manual workarounds, can’t deliver this. As a result, management isn’t getting their information for proper decision-making, audit trails are lost, compliance reporting lacks, while the cost of staff to perform manual work has grown.
That’s where the ETRM system comes in: the automation of complex and routine tasks and business processes around supply/sourcing management eliminates manual processes and reduces costly errors. Consequently, operational risks are minimized and process efficiency increases.
Crucially, part of eliminating manual processes is to automatically import or export data from and to external systems, such as market pricing, meter data, and accounting systems. Strong interface capability is a pre-requisite as this then enhances the straight-through-process (STP) of the overall ETRM solution.
Often an obstacle for companies not to transition away from their spreadsheet environment is the users’ perception of a loss of flexibility or tedious data entry. However, the best ETRM systems are designed to focus on the end user and better recognize how users interact with software in their daily work.
Similar to the tools they use in their private lives, those ETRM systems deliver intuitive screens, fast data entry, easy outputs and report-writing, flexible functionality that can be tailored, as well as accessibility via mobile devices such as tablets. Productivity is further increased with workflow automation through personalized access to the functionality that is routinely used, reminders of critical tasks and notifications/alerts.
In a time of a constantly changing marketplace and the effects of economic ups and downs, energy market participants must have the ability to rapidly adapt to the demands of new requirements and the evolving business environment. This introduces a hidden cost of having to modify and enhance the ETRM system to support new business processes. With budgets under pressure, companies are seeking solutions that contain their operating cost.
Total Cost of Ownership (TCO) is an industry standard method that considers the initial cost, such as the software, recurring maintenance, implementation and the supporting infrastructure as well as the on-going support cost. The more predictable the better.
Therefore, upfront your current requirements are covered while having the ability to meet future requirements with minimum additional cost. Specific future requirements could stem from company growth, product offerings to differentiate with, new market to compete in, or regulatory demands.
With a business process that stretches from deal capture to settlement, selecting a solution that offers a full suite of applications that are seamlessly integrated will work cost-effectively down the road. A system solution that is scalable and highly configurable offers the flexibility to be lower cost for the smaller company and minimizes additional cost when ramping up or changing course.
This is achieved by using template and formula-based software where no coding expertise is needed to maintain. With book structures that can be easily modelled, customizable templates, user-defined custom formula entries and ad-hoc report writing, such a solution provides a rich user-configurable environment and superior ability to configure complex business processes.
An ETRM solution with these characteristics, while supporting different deployment options such as the Cloud, enables companies to contain operating costs as their existing system investment allows to adapt and extend for continued usage with minimum vendor reliance. This ultimately results in a lower total cost of ownership over time.
Other than the endured economic hardship following the 2008 financial crisis, the biggest impact has been the introduction of compliance reporting. For physical power and gas trading, the Regulation on Energy Market Integrity and Transparency (REMIT) have caused energy traders across Europe to seriously look at their ability to comply. Legacy ETRM, or spreadsheet-based systems, have been and still are under scrutiny as they fail to deliver on those requirements, forcing companies to implement less-desirable interim solutions.
During the rapid development of the energy trading industry, technological investments in platforms were driven primarily by decisions based on the front-office. The back-office was often an after-thought.
As a result, the selected systems lacked the data structure and processing capabilities to produce outputs of the standard and complex transactions that were entered by an aggressively creative front-office. In an environment of complex regulatory reporting and also where ‘every cents counts,’ both the Compliance Office and Chief Financial Officer have therefore come to the forefront.
While many ETRM offerings are called next-generation, few were conceived with the back-office as a starting point. When considering needs like complex compliance management, then it is inevitable that the system’s technology must offer the latest in data structure and processing capabilities. Therefore, an ETRM system that is developed from the back to the front will offer superior output capabilities and be truly capable of evolving with the business operations, including support for non-standard contracts devised by the front office.
The European energy market will continue to change, while presenting opportunities and risks. The successful market participants rely on a modern and integrated ETRM solution to manage the complex business processes efficiently and cost-effectively. Only this way can they closely manage their main challenges of Increasing Complexity and Workload, Contain Operating Cost and meet Regulatory Requirements.