By some measures, merchant power assets look like a bargain, selling for well below their replacement cost. But whether low prices signal a buying opportunity or a value trap depends on the...
ETRM software is adapting to a changing energy market.
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.
As Enron’s senior director of advanced technology, Bell led a team of IT specialists that built the company’s first electronic trading and risk management systems basically from scratch, starting with natural gas and eventually expanding to electric power and other commodities.
Using that experience as a reference point, Bell—now a principal at Houston-based technology consulting firm International Commerce—says there are distinct similarities between the functional trading and risk assessment requirements his team had to plan for back then and the system requirements ETRM platform vendors and their clients have to prepare for today.
“Back then we had to build flexibility into the design, because nobody really knew how the energy markets would evolve. As designers, we had to keep all that uncertainty in mind,” Bell explains. “In some ways today’s ETRM environment is similar. Nobody really knows, for instance, exactly how the CO 2 cap- and-trade market will evolve, or what other types of regulatory measures will be imposed by the current or future administrations. So today’s ETRM platforms have to be really flexible too.”
Since the 1990s, electric utilities, wholesale trading subsidiaries, merchants and other power industry players have implemented an array of ETRM systems to support their day-to-day operations. Some are relatively simple spreadsheet processes developed in-house, while others rely on comprehensive enterprise software programs supplied by some of the world’s largest IT companies.
“The application really depends on the end-user,” says Patrick Reames, vice president of trading and risk management at consulting firm UtiliPoint International. “On one level you have a municipal power provider with 50,000 customers that basically works with spreadsheets. Or you have a state-wide player employing a vendor’s ETRM product on a limited basis. And then you have the full-blown ETRM user, usually a major utility that also has a wholesale trading subsidiary.”
All these players are facing a fast-changing market, and the promise of more changes to come in the form of environmental requirements and resource constraints. These changes create both risks and opportunities, which raises a key question for market participants of all sizes: Will the current crop of ETRM systems be capable of processing a mountain of new data generated by smart grid, renewable energy and CO 2 cap-and-trade initiatives?
Vendors and consultants are answering that question with new, modular components they hope will make it easy for industry players to add or upgrade task-specific ERTM functions if and when necessary, on a scalable, customizable and flexible basis. Further, the focus on flexibility extends to the delivery model. Increasingly, vendors are providing access to hosted ETRM products, such as real-time wholesale fuel price tracking programs over the Internet via the model known as “software as a service” (SaaS) ( see sidebar, “ETRM in the Cloud.” ) As a result, even comparatively