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ETRM puts Wind in the Sales of Renewable Asset Owners
By Hugo Stappers
01-06-2021 | 4 min read

The realities of feed-in tariffs and renewable projects without subsidies have subjected renewable asset owners  to wholesale electricity prices. This has increased their risk exposure; their ability to manage this risk is key to maintaining their competitive position. Market participants know that a sophisticated system is required to determine the risk/reward strategy that will help them successfully navigate this competitive environment. ETRM puts wind in the sails of renewable asset owners.

The value of renewable generation assets depends more and more on the expectations of the future price of electricity in the wholesale market. To deal with long-term market risk, corporate Power Purchase Agreements (PPA) have been used. However, PPAs with off-takers such as industrial and B2B counterparties, may not cover all the long-term risk and therefore market participation might be a viable option that provides access to products and instruments to better manage this risk.  

Market risk is defined as the variation of future earnings due to changes in market conditions. Unlike the typical developer’s risk associated with capital expenditure and construction of renewable projects, the risk of price exposure is significant as is the risk of loss for investments, also known as value at risk.

Consequently, with the wholesale electricity market being more liquid and pricing more transparent, asset owners are investing in expanding commercial capabilities to improve their ability for handling their trading and risk exposure. Consider that renewable players may be exposed to two markets: the Day-Ahead energy markets that allow to hedge against price fluctuations that may happen in real-time, and the Real-Time energy market that balances the dispatch of resources to meet the real-time demand for electricity.

A renewable asset owner must have strong market origination, trading, hedging, and risk management capabilities to successfully operate in the wholesale market.  This includes the ability to execute a variety of complex purchase and sale agreements (physical and financial) that effectively lock in electricity prices as well as link them across commodities to eliminate as much market risk as possible. Here is where a state-of-the-art Energy Trading and Risk Management (ETRM) system comes in.

Gartner defines an ETRM system as an integrated single or modular solution that can capture and manage wholesale energy market transactions, from execution to settlement, invoicing, managing, and reporting market and credit exposures for energy commodities. As a result, ETRM systems are critical for managing and optimizing wholesale energy market positions and risks in a rapidly evolving market.

Core elements of the ETRM system are:

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With the ability to model its entire portfolio of generations assets, support contract management, capture market price forward curves, and connect with spot markets, the ETRM system enables the renewable asset owner to support a strong risk framework and provide insights in its position, counterparty risk, market risk, shape risk, and Value at Risk, as well as perform portfolio management and risk mitigation. While stable returns are no longer guaranteed, the ETRM system better positions asset owners to take advantage of opportunities that may increase them.

Of course, there are varying degrees of tolerance for risk. Even if the appetite for risk is lower, with less emphasis on trading, a modern, integrated ETRM system enables asset owners to view sales risk exposure of all their assets in the medium and longer term.  In addition, they can run What-If scenarios to visualize how risk can be reduced or assess the value at risk impact when adding a new project or portfolio. At the same time, the system allows them to keep tabs on short-term exposure and whether the position is balanced at various locations and what the monetary impact may be. 

Renewable asset owners need to be agile in order to rapidly meet and respond to changing competitive conditions of the wholesale power market. Moreover, digitalization, automation and integration become mandatory for these participants to handle the increasing trade volumes at higher speeds. Forward thinking renewable players recognize that spreadsheet-based systems lack risk controls, near-real time position, updates and the ability to comply with regulatory reporting. Cloud-based Software-as-a-Service (SaaS) ETRM systems have become more accessible and serve as those crucial digital solutions that help businesses become more agile as the landscape changes, providing them with the latest innovations and emerging technologies through automatic updates.

For renewables asset owners to thrive, they need to be prepared to proactively manage their sales risk. To be clear, a risk is never a problem. A risk is something that can happen but hasn’t happened yet. As long it is a risk, it can be managed (provided of course you are properly equipped to do so). With the right ETRM solution, you         can take the wind out of your competition’s sails!

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Hugo Stappers
Global Sales Leader

Hugo Stappers is a global sales leader, in Energy Portfolio Management at Hitachi Energy. He has more than 30 years of experience in sales management, business development, and sales support roles in technology companies. Hugo helps energy industry decision makers understand the options for energy market intelligence services and commercial energy operations software that can enable organizations to maximize operational value and mitigate risk. You can connect with him at LinkedIn.

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