Energy trading is heating up and so is the market for energy trading and risk management (ETRM) software.
Trading requires information technology. “My business depends entirely on technology and access to information,” said one risk manager at an independent power producer. The only decisions now to be made by companies participating in trading is how much they are willing to spend.
The energy industry retreated from heavy trading activity after Enron’s collapse and the purposeful misreporting of gas prices shook participant confidence. ETRM vendors saw a complementary drop in the ETRM technology market, but high oil and gas prices, volatility, and increased liquidity supplied by financial institutions have reignited the market. Interest in ETRM has picked up, largely driven by regulatory requirements, risk mitigation, opportunities for growth and obsolete technology.
Although exchanges make the market, today emphasis is being placed on what goes on within the enterprise. Trading and risk management functions are performed by front, mid and back-offices (see illustration) and the business process involves constant information flow between them.
specific capabilities required
Energy trading companies can expect to see a wide range of costs for implementing ETRM systems. On the low end, an installation can cost $1 million for ETRM supporting 20 users in a local market. On the high end, there’s been at least one four-year installation to enable global cross-commodity trading at a cost of $450 million. One utility company with a fairly large generation fleet is replacing an obsolete legacy system and expects to spend $20 million.
Today, the ETRM system buyers are not just energy companies. Financial institutions that are getting into asset-backed trading are also in the market for these systems. Certain capabilities are essential in ETRM systems: access to data and analytics through portals and dashboards; energy and credit risk analytics to establish value; integration of applications; and high-speed calculating capacity.
“- Enterprise access to data and analytics. While some companies are still focused on putting together market information and trading tools on a portal for the front office, the more advanced companies are concentrating on building enterprise portals that provide role-based access not only to front, mid and back-office, but also to operations and corporate. The most valuable portals will not just assemble streaming data but will display graphics, use geo-mapping of price and other data and, most importantly, include the ability to run analytics that provide business intelligence specific to ETRM. At the executive level, a portal alone is not enough; dashboards with key performance indicators are needed to support business performance management.
“- Energy and credit risk analytics. Trading energy commodity is not like trading financial products. The commodity tends to be lumpy and, for some commodities like power and natural gas, tied closely to regional markets. In addition, there are regulations specific to these commodities. Generic analytics cannot be used to establish value. On the other hand, the industry can take advantage of more generic credit risk analytics used by the financial services industry for financial instruments.
“- Integration capabilities. ETRM depends on the integration of many applications, especially in the oil and gas industry where IT organizations currently run hundreds of applications. While there are opportunities for consolidation of redundant systems, there is not one comprehensive integrated application that can handle all functions. Niche applications are still required. Currently, the norm for integration is enterprise application integration (EAI) technology. Along with integration buses come alerting capabilities, critical for companies that must be able to confirm deals quickly so as to avoid losing opportunities.
“- High-speed calculating capacity. The mid office needs to be able to run simulations, stress testing and optimization routines involving numerous variable and large data sets within hours, not days. One of the Holy Grails of energy trading has been the ability to move from overnight reporting to intra-day visibility to position. Where highly structured deals are involved, complex calculations have often taken many hours, if not days, to complete. The recent implementation of a high-performance computing intra-day reporting application at Powerex is a major step forward.
Jill Feblowitz is program director, energy wholesale strategies, at Energy Insights, an IDC company. Ms. Feblowitz, a nationally recognized consultant in the application of information technology to the business problems of the energy industry, manages Energy Insights’ Energy Wholesale Strategies research program. She can be contacted at firstname.lastname@example.org.