Integrating Renewables into Energy Markets: How Automating Energy Trading and Risk Management Reduces Complexity

Energy commodities are notoriously volatile, and the growth of intermittent renewable energy generation is only making global power markets more unpredictable.

The International Energy Agency predicts almost 95% of the increase in global power capacity through 2026 will be in the form of renewable energy. Australia is a poster child for this clean energy transition. Led by solar and wind, 32.5% of electricity generated in Australia in 2021 came from renewable resources, with the country’s government projecting that the number will surpass 50% by 2025 and 69% by 2030. 

From traders to power generators to large industrial operations, any company with significant asset-based energy commodity exposure or wholesale market exposure, via participation in regional wholesale markets, needs a modern energy trade and risk management (ETRM) solution. ETRMs help companies manage operating in power markets that are increasingly fast-moving and complex due to the intermittent nature of renewable energy, enabling participation in wholesale spot markets and other activities.

Unfortunately, the changing nature of power markets has created challenges that ETRM systems used by many utilities, power offtakers and energy traders today are not prepared to meet. 

ETRM solutions have undergone a digital revolution over the past decade, just as the energy industry has experienced a rapid transition to renewables.

While some legacy on-premise ETRMs and even spreadsheet-based systems are still in use in corporate offices, the energy industry is increasingly transitioning from on-premise to private cloud-based or to ETRM systems delivered as Software-as-a-Service. The transition is driven by the imperative for companies to tap into the power of big data and digitization, which is the only way to successfully operate in a fast-moving market.

However, because of the collapse of many energy commodity prices in the 2010s, which squeezed margins, many ETRM initiatives were put on hold or scaled back to reduce costs, just as rapid market changes like the adoption of renewables were beginning to make modern ETRM capabilities more essential.

Today, ETRMs used by energy-commodity-focused offices fall into several categories, ranging from antiquated and bespoke to cutting edge.
 

• Spreadsheet-based systems are typically developed in house and with limited modern capabilities such as advanced data analytics.
• Legacy on-premise ETRMs were often developed decades ago by trading operations that commercialized and sold their systems to other commodity-focused organizations. For particular commodities, these ETRMs can provide a robust set of capabilities that have served a company well for years. But the older technology architectures in these legacy platforms make them difficult and expensive to integrate into other systems, such as enterprise resource planning. And unlocking datasets for use in advanced analytics can be impossible.
• Next generation On-premise or private cloud-based ETRMs create more efficient operations, increase understanding of risk exposure, and unlock many advantages of modern digitization such as real-time reporting, forecasting and analytics capabilities. Many companies continue to rely on legacy on-premise or on private cloud-based ETRMs due to perceived privacy and security concerns.  
• ETRM Software-as-a-Service  where the software is delivered as a service, with only the need for an internet browser to access from anywhere and sold on a subscription basis. The combination of high upfront costs, the hassles of ongoing maintenance, and the frustration of technological obsolescence is making ETRM system buyers move towards innovative business models based on services. Consequently – and accelerated by the COVID-19 crisis - cloud-based Software-as-a-Service (SaaS) C/ETRM solutions are overtaking traditional delivery software.

As wind and solar power become more cost competitive globally, governments are moving away from incentive structures like feed-in tariffs. Australia, for example, has seen widespread consumer complaints about low solar feed-in tariff rates as the country’s electricity regulator has taken the position that such tariffs have “no value” for the market.

This trend has led power generators and renewable energy developers to seek new structures to finance and operate renewable projects, and long-term PPAs have emerged as a leading option. In a 2021 report, Business Renewables Center Australia noted that there had been 110 publicly confirmed renewable PPAs, supporting 10.5 GW of renewable energy capacity with a value of $4.4 billion, in Australia as of October 2021.

A modern ETRM, like Hitachi Energy’s award-winning ETRM solution, needs to support the PPA contract lifecycle, from deal capture to risk management, reporting, settlements and invoicing. More specifically, Commodity Technology Advisory found that market participants need solutions that can handle the unique characteristics of executed PPAs, including:

• Complex, potentially non-linear pricing, including caps and floors for volume and pricing
• Efficient time-series and volume management to update frequently production forecasts, import actual off-takes and volume corrections
• Flexible scenario capabilities to support hedging and other portfolio analysis
• Automation of settlements and related invoicing process
• Valuing and management of PPA-related green certificates — such as renewable energy certificates (RECs) — throughout their own trading lifecycle, from trade capture to risk, reporting, registry reconciliation, settlements and back office

Purpose built solutions, such Hitachi Energy’s SettlementTracker, possibly combined with a Meter Data Acquisition (MDA) solution, can be a less costly and complex answer to support the PPA lifecycle, particularly for organizations with smaller asset bases. Hitachi Energy is currently implementing one such solution for a major utility-scale solar PV project in Saudi Arabia that will deliver Solar performance including an Accounting Settlement System.

Preconceived notions around the time, effort and cost of implementing a new ETRM has led many companies to delay the investment. However, the cost of relying on an outdated ETRM, one that cannot keep up with the rapidly evolving power market, could far surpass the alternative.

Cloud-based ETRMs, but specifically when delivered as multi-tenant Software-as-a-Service, have emerged as the most cost-effective options, even compared to on-premise software, due to their low cost of entry, potential lower total cost of ownership, and cheaper maintenance and upgrades. For beginners with smaller renewable energy asset bases, leaner solution like Hitachi Energy’s SettlementTracker offer less costly, less complex entry into the world of automating the execution of renewable energy offtake contracts.

Learn more about energy trading and risk management (ETRM) from Hitachi Energy.