From supply chain and staffing challenges to the war in Ukraine and natural disasters, a tangled web of global events has led to economywide inflation and price volatility. Nowhere have these phenomena been observed more than with energy commodities.
Take Australia, for instance, where recently the spot price of thermal coal was up 243% and wholesale power prices were up 141% year-over-year. The Australian government is even considering limiting the export of LNG to ease the pressure on soaring natural gas prices. In Europe, Swiss energy company BKW increased the remuneration per solar kWh fed into its grid from independent power producers and private producers by more than 400%, reflecting the upward pricing pressure on German electricity wholesale markets
Many recently surging energy prices have started to come down, but that illustrates the challenge volatility presents to the energy trading and risk assessment operations for companies that have significant exposure to energy commodities. And for an already volatile market like electricity that is becoming even more volatile on an hourly or even minute-to-minute basis due to the growth of intermittent solar and wind power, the challenges are magnified.
Whether your business is a power generator, energy supplier or large industrial energy user, it can support front-, middle- and back-office efforts to manage energy market volatility with a modern energy trade and risk management (ETRM) system.
Renewables, Electrification Create ETRM Pain Points from Front Office to Back
The trend toward electrification and electric vehicles, and the rise of intermittent renewable energy has created the need for increasingly flexible ETRM capabilities. However, as we explained in our previous blog, “How Automating Energy Trading and Risk Management Reduces Complexity,” not all energy commodity-exposed companies have implemented a modern ETRM that can keep up with the rapidly evolving power market or capitalize on the potential of big data and data analytics.
Without a modern ETRM, market volatility is contributing to similar pain points across many organizations, from the back office to the front.
For example, in the front office (e.g., traders), pain points include inaccurate information leading to wrong decisions, lack of real-time analytics, system response delays, lack of automation and system capabilities, and difficulties searching the data.
ETRM pain points for the middle office (e.g., risk managers) include incorrect data and other errors leading to invisible risks and unexpected losses, lack of standardization in trading book and market risk data, processes that reflect an end-of-day mindset rather than real-time, labelling complexity to cover hedge accounting requirements, and unnecessary volumes for processing and investigation caused by internal deals
And the back office (e.g., settlement analysts, accountants) feels the pain of inadequate ETRMs in ways that include lack of automation for back-office tasks, too much process complexity, limited control over market data, lack of transparency into settlement prices, difficulty updating and aligning processes when new products are introduced, and unfixed repeating errors.
3 Steps to a Modern ETRM that Helps Manage Market Volatility
Many of the pain points across office functions relate to time delays, errors, and too many complex and manual processes. In environments of high volatility, such as with renewable energy-driven power markets, the potential negative impact of those pain points is magnified.
“Renewable energy is overtaking fossil fuels such as oil and coal as the world transitions to cleaner energy solutions,” says Hugo Stappers, global sales leader of Energy Portfolio Management at Hitachi Energy. “When evaluating and selecting an ETRM system, the market participant’s emphasis now is on capabilities that support those energy commodities instead of the legacy fossil fuels. An ETRM system excelling in electricity, natural gas, biofuels, and energy attribute and emission certificates — while providing sufficient functionality for legacy commodities in the interim — is the preferred choice.
Businesses can take three steps to successfully implement an ETRM optimized to help the entire organization manage challenges such as renewable energy-based market volatility.
- Think first about what the back-office needs to produce (reporting, contract settlement, certificate management). This creates cause-and-effect thinking in which, by looking at the back-office needs carefully, businesses will get from their ETRM what they need from back to front. Today, few ETRM solutions were conceived with the back office as a starting point, but forward-thinking companies are starting at the back to realize value as they build the path all the way to the front.
- Bring silos together, including operational analytics (planning), finance and risk (commercial operations for forecasting, market communication, trading). Rather than through a monolithic system, silos should come together under one umbrella by leveraging modular solutions. This larger end-to-end footprint provides tangible benefits to meet the specifics of the organization’s goals to navigate the energy market. It also covers the journey for everyone from renewable asset investors to established wholesale electricity market participants.
- Leverage market intelligence through data that energy traders and analysts can use to evaluate energy market shifts and assess risk. The inherent short-term volatility in intermittent renewable resources such as wind and solar makes forecasting more critical than ever. Access to historical, real-time and forecast energy data on a single platform simplifies data aggregation and analysis for users.
Learn more about energy trading and risk management (ETRM) from Hitachi Energy.