Al Dunn, Enermetrix
When it comes to energy trading, an electron is an electron, a molecule is a molecule, there are few brand-name loyalties, and the best price wins.
So why is it that there is still a wide variance in energy prices at any given time? Even as risk management and trading technologies become more ubiquitous, costs can still vary significantly from supplier to supplier. In addition, the “cost to procure” varies widely between various energy users. Part of the answer is operational efficiencies gained through the use of Internet technologies and system interoperability and integration.
At each point along the energy transaction value chain, automation can help buyers, sellers, traders and users alike achieve the best price available. On the surface, that may seem like a simplistic statement, but the energy value chain is made up of any number of complex transactions or “touch points” where an infinite amount of data is captured, transmitted and shared. If information sharing is seamless and systematic, energy users get the best possible pricing and energy sellers make the right decisions and reduce their risk.
Think of this automated process across all of the enterprises of buyers, sellers and third parties as a network, with each participant playing its part to create the retail energy transaction. Successful participants in the energy transaction of the future will leverage best-of-breed, off-the-shelf software products and integration technologies from providers savvy in all aspects of retail energy purchases.
The complexity of choice
Today’s energy market has countless players with many roles. These players need a reliable suite of software products and services to map the terrain and offer solutions in real time. Both energy buyers and sellers must weigh hundreds of details when trying to secure the best price. Each transaction involves rates and tariffs, delivery points for energy, and the pipelines and transmission lines that can deliver to those points. Decision-makers must also account for historical energy consumption, historical energy costs, how costs break down by local and third-party suppliers, history of supplier contracts, contract terms and conditions, and credit information about accounts and counterparties. Market price volatility compounds the process, demanding almost instantaneous decision-making capabilities, increasing risk for all parties.
Many of today’s players do not have ready access to all of the information or support systems they need to determine if they are getting the best price.
Traditional request for proposal processes are overwhelming, resource intensive, and speed to market is dismal. The key is total integration and communication-not just between buyers and sellers, but also between all of their enterprise systems, energy users and the regulated distribution companies. The goal is complete system interoperability using all possible resources to instantly communicate accurate and reliable data. This integrated knowledge reduces costs and risk, eliminates uncertainty, and ensures good business decisions the first time. The structure demands intranet and Internet access, real-time information sharing, and pinpoint accuracy of the data.
To automate and capture energy value chain touch points online requires a seamless approach to system interoperability and Internet operations. It is not difficult to build such a manual process to handle a few hundred records a day. The challenge is scalability-to build an automated system or network that handles thousands of records a minute, and one that recognizes the need for exceptions, workflow, and all of the real-time, real-world activities. It takes full enterprise application integration (EAI), for example, an XML-based application programming interface (API) that is secure and encrypted, ensures guaranteed delivery, and enforces non-repudiation with digital signatures. There are many challenges to be addressed when creating such a system.
In any complex and fast-paced transaction activity, the back office can be overlooked. Networking and information feeds allow the office to keep pace with the sales force. The moment an energy user accepts an energy offer a whole series of activities must take place. The seller assumes risk and needs to update its risk management software. Energy users and various brokers or ESCOs that may be assisting the energy user need to update their accounts receivable/accounts payable (AR/AP) systems to reflect the impact of new energy pricing. Local distribution companies (LDC)-utilities-need to be notified of the switch and the potential impact on their Provider of Last Resort (POLR) load. Network data can also, for example, track across the seller’s entire portfolio to make sure it is not overextending. The network can then feed the service provider’s billing systems, telling them how and when to collect.
Portals for predictability
Interoperability can go even further. Network users rely on exact information from reliable sources covering markets, commodities, real-time pricing and credit ratings. With this information, they can understand their volatilities and risk. Networked members can share market news that can affect and predict pricing. A seller can know the credit-worthiness of its buyer and can even purchase credit protection to guard against default. Many of today’s players do not have ready access to such information or support systems. If they want it, they must usually find it at a very high cost of both time and money.
As the market continues its growth, full network integration will replace existing island systems. To complete this evolution, the market must find ways to map flawlessly between these disparate systems. That is one benefit of EAI or middleware applications. Middleware allows systems to “talk” and share information freely, reducing the necessity of duplicate data entry operations and the likelihood of data entry error. The more integrated the network, the more participants it has, the more value middleware adds. And, to have full value, the network should provide information from real-time transactions in the marketplace.
Another element that should not be ignored, although it’s often forgotten, is workflow management. Within the data flow there will be, for example, exceptions to the norm, or questionable data that someone must review. Big and small customers will require different amounts and types of data, and will feed different amounts and types back to the network. Full integration must take these real-world factors into play.
Communication and security standards
Another important consideration is how do these systems communicate over the network? Fortunately, the Internet offers us open protocols such as HTTP to communicate simply. Unfortunately, if the Internet is the chosen medium for communication, very careful attention must be placed on privacy and security. Since energy transactions contain key corporate data; e.g., plant locations and consumption that can be related to production schedules; information flow between systems must ensure that only necessary information is shared, and that this data is protected during transmission and storage. Authentication and authorization standards need to be agreed upon and enforced by all systems involved in the transaction.
A proper energy transaction network should also work behind the scenes to screen both buyers and sellers, searching all contracts available online to ensure there is nothing unfair on either side of the equation. Every energy user, buyer and seller should also know and abide by the code of conduct while on the network. This protects all of the members, much like the financial network in the stock market. All players are obligated to follow the rules.
Participants look for and enter a well-planned energy e-procurement network for a reason. They expect seamless operations, and they rely on the quality of the avail-able data. The integrity of the systems and interoperability must be maintained; but equally important the integrity of the transaction network information must be maintained.
That said, electrons are still electrons, molecules are still molecules, and a healthy bottom line is still “the” bottom line. Fully automated, highly networked, interoperable trading systems make getting all three a lot easier.
Dunn is the vice president of emerging technology at Enermetrix. He may be contacted by calling 978-461-0505. For more information about Enermetrix, visit www.enermetrix.com.