Next Generation Power meets Next Generation ETRM

By Allegro

Record demand, tightening supply, increasing regulations. Now, more than ever, generators and marketers of power are looking for better ways to gain transparency into and optimization of their assets and physical and financial positions. The new generation of Energy Trading and Risk Management (ETRM) solutions play a crucial role in that quest.

Constantly evolving power markets and pricing schemes, increasingly volatile commodities prices and unstable credit conditions are just a few of the challenges facing participants in the power industry. Other issues include skyrocketing transportation costs, growing emissions mandates and increasing regulations on trading with regards to hedge activities. These things, coupled with the significant increase of competitive, non-utility power generators have dramatically changed the nature of the power industry over the last ten years. The impact has been most notable in the way wholesale power trading and marketing is conducted. It is the most dynamic of all the developments to sweep through the industry in the past decade.
As the conflict of rising demand for power and lack of generation supply grows, along with ever-increasing emissions regulations, the need for highly developed tools to assist in managing and optimizing assets and physical and financial positions will become the key management issue for power market participants, especially for generators of power. Energy Trading and Risk Management, or ETRM, solutions comprise a set of analytical and trading tools along with physical and financial management systems that allow enterprises to quantify and understand risk exposure and gain new levels of transparency. The new generation of ETRM systems can help power entities manage the entire power lifecycle from fuel supplies to the marketing of power.

Robust commodity trading and risk management solutions exist today that interact with financial and logistical data from a variety of external, real-time sources. These solutions apply a comprehensive set of analytical, simulation and optimization tools to ensure optimal trading scenarios, accurate position keeping, option and asset valuation, and logistical plans for decision making across many commodities, including natural gas, coal, fuel oil, emissions and power. But perhaps the greatest value of an ETRM system is the ability to provide an enterprise with an overall integrated portfolio management solution, one that provides a complete holistic approach across strategic, operational, regulatory and financial functions. To that end, more enterprises are endeavoring to deploy cross-functional risk solutions across the business lifecycle. Deployment of advanced energy trading and risk management systems will require those solutions to be fully interactive, not only with the balance of an enterprise’s financial and physical management functions, but also externally with live market data and information.
Recent exponential growth in the energy commodity markets has changed the rules and requirements of energy trading and risk management strategies and systems. With the growing price volatility of both the fuel to produce power and the price of power itself, commodity risk managers are now seeing many of the risk analytics, strategies and solutions already being applied in financial trading circles rapidly migrating into the energy commodity trading space. However, an energy trading and risk management operation is functionally complex, dependent on many diverse skills, and very data intensive.

Compounding the problem is the fast pace of financial innovation which can make many risk management models obsolete, and as a result enterprises upgrading to next generation risk management systems often lag behind the market trends. Additionally, many risk management systems fail to offer a holistic representation of different risks. Yet the need to greatly enhance the overall risk management functions of an enterprise, on both the financial and physical aspects of their commodities, is quickly becoming a corporate mandate rather than an optional luxury, thus driving corporate focus on robust, solid risk management solutions.

ETRM systems for power-related enterprises can be applied across the entire lifecycle of power, from the acquisition of fuels to generate power, to the marketing and trading of power. Generation fueled by natural gas, coal, nuclear, solar, fuel oil, hydro, and geothermal can be managed much more efficiently. Physical and financial positions spanning power, fuel, transmission, ancillary services, swaps, options, and structured transactions can be captured and valued, giving decision makers a holistic and transparent view of their portfolios. P&Ls, volumes, risk metrics, exposures and other key indicators can be viewed on a real-time basis.

Let’s look at how an ETRM system can be integrated across the power lifecycle in more detail:

Generation
ETRM solutions for generation give asset managers the tools they need to optimize, value, and settle fuel and power transactions – and physical assets. They can provide detailed and real-time reporting of P&L, credit exposure and other metrics, as well as automated settlement and regulatory compliance. With full visibility of the entire generation business, ETRM solutions enable rigorous valuation and risk management - driving effective asset management.

Risk management, scheduling and settlement solutions for power can drive business efficiency, while working in concert with related components for coal, natural gas, oil, and other fuels. These solutions also support economic dispatch of multiple units to provide for optimized physical logistics and scheduling management for all transportation types. Again, the key value is tight integration with physical and financial transactions, management of physical capacities for fuels and power, and a consolidated view of the entire portfolio.

At a more granular level, ETRM solutions for power can provide a generator the ability to create and manage load shapes for expected demand in and/or generation output, along with the ability to store forecasted average volumes of energy in increments based on time ranges, time units and forward curves associated with the load shapes. The system can capture and utilize volumes, efficiencies, and other plant data, enabling a holistic view of the entire operation.

ETRM solutions can also provide physical logistics functionality that supports scheduling management for transportation, such as barge, rail, truck and pipeline with scheduling automation and audit tracking controls.

One final note with respect to the newest commodity on the block: emissions. The amount and complexity of planning that generation asset owners will need to engage in to make sure that they cover their deficit of allowances and accurately account for any credits can be extensive. These allowance limits will fluctuate as demand goes up and down – requiring generation owners to pay careful heed to the emission cost of incremental MW’s. The market need for accurate record keeping or “visibility” of physical emissions positions is critical. Additionally, as non-asset players enter the market, especially those who are trading speculatively, the market will develop rapidly and concerns about market exposure for all participants will grow. Thus, the role an ETRM system will play is crucial for generators dealing in emissions.

Transmission
Transmission's unique commercial and logistics demands present merchant power generators, utilities and power traders with daily business challenges. ETRM transmission and power solutions can provide an enterprise with efficiencies in tagging, scheduling, valuation and settlement of transmission, in addition to streamlining the process of planning and transferring physical power between counterparties.

ETRM solutions can manage physical power scheduling, transmission and actualization for energy companies that move physical power including generators, utilities, municipals, cooperatives, energy traders and merchants. Because transmission is the crucial link between generation and power marketing, it is of real value that an integrated ETRM system enables schedulers to view transactions in real-time as they are entered by traders. Additionally, these systems can allow traders and schedulers to accurately value their transmission assets and utilize them seamlessly from trading to scheduling physical power.

Power Marketing and Trading
Perhaps the fastest growing segment of ETRM in the power industry is power marketing and trading, and the newest ETRM functionality in this space are the tools for real-time analysis and trading on live markets, also called interactive trading environments.

Interactive trading environments, or ITEs, give traders and risk managers the ability to simulate transactions, optimize portfolios and execute strategies to live markets. An ITE enables traders and marketers to view existing positions and to dynamically optimize them based on live markets. P&L, value-at-risk, mark-to-market exposure and other metrics are continuously updated. Optimized scenarios can be ranked and allow a trader to quickly identify the most profitable outcomes.

Beyond the obvious benefits to traders, these solutions can benefit front and middle office business functions with real-time scenario analysis, market alerts, and credit monitoring, while settlement, invoicing, and reconciliation functionality can enhance back-office efficiency. Real-time valuation of energy, capacity, ancillary services, structured transactions, derivatives, swaps, and physical positions can give power marketers the necessary information to execute trades quickly. The enormous volatility, large transaction volumes, basis risk, time constraints, and fuel hedges are some of the commercial considerations power marketing businesses must manage on a daily basis. ETRM solutions for power traders and risk managers can also provide real-time analytics and what-if analysis across multi-commodity portfolios. Power positions, basis trades, and fuel hedges can be viewed, analyzed, and stress tested from a holistic portfolio view.

Lastly, the newest generation of ETRM power solutions can provide connectivity to commodity exchanges and market data services to provide real-time price signals, market opportunities, and automatic deal-capture. Additionally, the ability to integrate with ISOs, RTOs, and transmission providers aids in streamlining scheduling, logistics, and settlement processes.

As with all business process solutions, an energy trading and risk management solution’s value ultimately lies in its ability to integrate with related corporate systems such as deal capture, contracts administration, logistics operations as well as all the back office accounting systems. Visibility and reporting of critical data for P&L, physical and financial positions and a wide variety of additional risk exposure reports are all extremely valuable and necessary not only to comply with regulatory accounting standards, but to allow timely reporting of financial data as well. The ability to greatly enhance the overall risk management functions of an enterprise, on both the financial and physical aspects of their commodities, is becoming an overarching corporate mandate in the growing volatility of the commodity markets. Participants in this new generation of power markets will ultimately need this new generation of ETRM systems.