Legacy ETRM system replacement: big-bang or modular implementation?

Energy Trading and Risk Management (ETRM) systems automate the complex and routine tasks and business processes of energy trading, eliminate manual processes, reduce costly errors, minimize operational risk, and increase efficiency.

As with any software environment, ETRM systems need to be updated, upgraded, or replaced over time as technology improves and business environments evolve.

The strategy behind how to implement an ETRM system update – with a “big bang” or “modular implementation” – is a challenge that organizations must examine from a few different angles, but. Which approach is right for your business?

Today, larger energy companies often weigh how disruptive and costly a wholesale replacement of their ETRM system could be against taking a more surgical, cost-effective approach that updates select functionality designed to help them adapt to new business environments.    

The "big bang" ETRM go-live, where all the main modules of an ETRM system are updated and go live at the same time, is a widely known and practiced approach.

The alternative approach is to adopt some level of phasing – for example by functional area or business priority.

Today’s volatile energy markets require robust portfolio management, risk analytics, near-real time reporting, and automation to help provide timely answers to fundamental questions about supply and demand, portfolio performance, valuations, and profit and loss.  

However, as legacy systems fail to evolve and system limitations are hit, dozens of spreadsheets, isolated home-grown applications or manual workarounds spring up to help with handling those functions outside the main system.

Consequently, those non-integrated workarounds can’t deliver.

Management doesn’t get their information for proper decision-making, audit trails are lost, and compliance reporting lacks while the cost for staff to perform manual work grows.

Calls for a system replacement grow louder, driving energy companies to re-evaluate their ETRM systems.

Frustrations mount over legacy system complexities, unacceptable maintenance costs, system integration issues, changing analytics and reporting needs, compliance risks, and being unable to make quick course changes.

For most small organizations, a “big bang” approach is feasible.

On the other hand, for large and complex organizations, some degree of a phased implementation may be inevitable.

To mitigate transition risk, a composable strategy and budget-friendlier approach replaces lacking capabilities with a specialized best-of-breed solution, which can be easily integrated and add value in functional areas that require improvement.

Consider the following examples of functions / supplemental modules that integrate with - and augment - existing ETRM systems:

·       Counterparty Credit Risk: Manage credit exposure risk of counterparties and associated contracts, including credit information, credit scores, collateral management, margin calls, and advanced risk metrics (credit value at risk, and potential future exposure).

·       (PPA) Contract Settlement: Streamlining the contract-to-bill process, from capture of all invoiceable trades under master agreements (e.g. EFET, ISDA) and complex contracts (PPA, intercompany, generation and renewables) to creation of accrual entries.

·       Energy Certificate Management: Built-for-purpose functionality to manage the increasing volumes of renewable energy certificate/guarantee of origin cancellations, while mitigating the risks with trading. Automates the end-to-end GO/REC tracking and management of processes from generation to assignment and retirement or expiration, with ability to capture registry attributes to facilitate matching based on certificate specifications.

·       Advanced Risk Management: Measure and manage risks caused by fluctuating energy prices across all physical and financial trade lifecycles, with risk metrics for Value at Risks (VaR), Cash Flow at Risks (CFaR), Earnings at Risks (EaR), Potential Future Exposures (PFE), and Credit Value Adjustments (CVA).

·       Derivative Hedge Accounting: Ability to take advantage changes in the hedge accountings standards that are giving companies new alternatives and possibilities for trade and risk management and financially hedge their portfolios while staying compliant with IFRS-9.

The consensus, when it comes to complex software solutions like ETRM systems, is that big bang implementations are riskier than phased implementations.

There are good reasons for this, including the difficulty to roll back to the old system if everything goes wrong after a few hours of operation, and achieving full end-to-end testing.

There are simply more things that can go wrong when many modules go-live together.

In contrast, a modular implementation tends to involve discrete business units or functions, so there is a better chance that any serious issues can be contained.

For the same reason, it can be easier to revert to the old system if necessary.

For an organisation with multiple large sites across a region, it makes sense to start with a pilot site and then roll out the template to the other sites.

That’s very often the approach taken by large multinationals. The same thinking applies for multiple business units.

In the process, cost-savings might be realized as the lessons learned from the first project can be replicated at the next location.

For a phased approach, a modular and modern ETRM suite of applications, which offers highly flexible configurability to evolve with the changing business and includes embedded integration capability, is required.

Areas where improvements are needed often involve the middle and back-office, since the original ETRM system investment and selection were typically decided by the front-office.

The most effective modules are those which are part of a system that will have been developed from the back-end to the front-end, so that they deliver the proper data structure and processing capabilities.

Inherent to next-generation ETRM software is that a template and formula-based approach allows the user to maintain them and thereby lower total cost of ownership over time.

Legacy systems usually represent years of development and investment and provide mission-critical capabilities upon which the business has come to rely.

While those ageing systems may not provide the flexibility to evolve with the business, a complete system replacement may not be realistic while a phased approach is.

A partial functional replacement may either modernize the system or just be the start of a full replacement.

A phased approach can lead to quick wins, and be a much lower-risk, lower-cost solution that delivers the desired business benefits one module at a time.