Ask Ed Bell about energy trading and risk management (ETRM) technology and he’ll likely bring up his days with Enron back in the early 1990s. Bell—now a principal at Houston-based technology...
ETRM software is adapting to a changing energy market.
certain number for cap and trade?’”
A 2009 Gartner study, co-authored by Harrison, confirms that existing ETRM platforms are “particularly well-suited” to tracking and trading CO 2 certificates. After all, Harrison points out, many vendors have supplied ETRM solutions for CO 2 to U.S. investment banks and hedge funds already active in global carbon markets. Further, he says, many U.S. utilities already are working on what their CO 2 position would be in the event of cap-and-trade legislation.
“The EU is already trading CO 2 under a cap-and-trade scheme and ETRM vendors are offering CO 2 solutions to utilities in that market,” Harrison says. “Should the United States establish a national cap-and-trade scheme similar to the EU’s, then ETRM solutions for utility CO 2 trading in the U.S. will be readily available.”
There will be differences in a U.S. scheme, he adds, but they largely will be administrative, such as the national register for all CO 2 emissions and offsets. But primary functions—such as recording transactions with brokers through exchanges or bilaterally, managing certificate inventories and producing CO 2 position reports and risk analysis—shouldn’t differ much between geographies.
“Remember, CO 2 is internationally traded,” Harrison says. “And unlike a physical commodity such as a metal or oil, there is no physical delivery context, which often has geographical cost implications such as transportation duties.”
If and when CO 2 cap-and-trade measures are instituted in the United States, the main issue for most utilities might be building out the processes needed to gather the data associated with CO 2 emissions.
“You have to understand the internal processes used to the gather the data that’s required, including verification and auditing,” Harrison says. “The ETRM system will have to configure and analyze data that includes planned emissions, allocated credits and credits received from renewable power resources. Pulling all that information together likely will be more challenging for utilities than actually trading the credit allocations themselves.”
While vendors and industry pundits focus almost entirely on ETRM system technical capabilities and client benefits, there’s one last component that trumps everything else combined: the human element.
At least that’s the way Cary Oswald, managing director of risk strategy and control at Xcel Energy, sees it.
Oswald and his team employ SAS risk management and business intelligence software to project the duration, severity and earnings-per-share impact of various risks. And with 5.3 million customers in eight states, an energy portfolio consisting of coal, natural gas, nuclear, hydroelectric and wind sources, and thousands of miles of natural gas pipeline, Xcel has plenty of risks to analyze.
Four times a year, members of Oswald’s risk-management team meet with executives from various parts of the company to gather information on potential risks for each business unit. The SAS program is used to tabulate, project and rank each risk on an EPS basis. The rankings and analyses then are presented to upper management for resource allocation and timing decisions.
The quarterly process has the enthusiastic backing of both business unit managers and corporate executives alike. However, Oswald points out, the critical risk-analysis component