Green Trade


ETRM software is adapting to a changing energy market.

Fortnightly Magazine - January 2010

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 CO2 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 CO2 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 small players with limited IT budgets might be able to discard the spreadsheets and access top-shelf ETRM data processing services.

SOA Platforms

Three major ETRM vendors, SAS, Ventyx and Allegro, base their enterprise offerings on open format platforms that can, if necessary, be scaled up gradually to meet changing customer requirements.

For instance, RiskAdvisory, a subsidiary of SAS Inc., released its latest ETRM platform, BookRunner v12, in November 2009. Like other enterprise system suppliers, RiskAdvisory built BookRunner on a flexible, service oriented architecture (SOA) platform—which opened the door for the company’s growth as the energy market evolves.

RiskAdvisory opened for business in the 1990s and grew into a 15-employee boutique firm that provides risk management services to energy companies. It was acquired by business intelligence behemoth SAS in 2003 and ported its proprietary BookRunner software onto the SAS architecture, which gave RiskAdvisory’s customers access to a wide range of statistical analytics, reporting, and forecasting capabilities.

“So many clients still have fragmented reporting systems,” says Louis Caron, an energy risk specialist with RiskAdvisory. “For example, a large natural gas and electric power utility may gather data from two or three logistics systems and then use spread sheets to consolidate its market and credit positions. Moving BookRunner to the SAS platform allowed us to integrate 64 different data formats and bring an assortment of data into one common modeling, analytic and reporting framework.”

To provide additional flexibility, the latest generation of BookRunner is comprised of three modules that can be accessed through a single browser interface. The SOA design supports analytical functions ranging from deal capture and transaction management, to risk analytics, advanced modeling tools and compliance reporting.

“Users access the information from a dashboard that connects to a Web portal,” Caron says. “A credit risk manager can view all the applicable exposures and drill down further, all the way down to the transaction level if that’s necessary.”

Another company in the ETRM space, Ventyx, has taken a similar approach with Monaco, a scalable ETRM platform divided into front-, middle- and back-office modules. As the energy markets continue evolving, says Simon Crisp, senior vice president of operations solutions, the system can be custom-configured to meet various data capture and transaction requirements.

“There’s more complexity to the marketplace than many customers realize,” he says. “Customers have a lot of contracts they’re not able to model accurately in their existing ETRMs. Clients want a single platform where there are no spreadsheets, an application that’s much more complicated than the prior generation of ETRM products.”

Likewise, Allegro Development says it has combined an SOA platform, which allows external systems and data sources to directly integrate with its Allegro 8 system, with what it calls a standardized integration component platform. The combination integrates existing systems and allows customers to select only the ETRM components and functionalities they need. That, the company says, simplifies deployment and enables companies to expand the system later as needed.

“Today’s customers want a single story, one solution with real-time information and decision support tools that gives an integrated view of their entire portfolio so they can examine total risk and exposures,” says Michael Hinton, Allegro’s chief marketing officer. “Things change fast, so they need to work in real time to either minimize or take the opportunity presented by the risk. To do that you need connectivity, both inside and outside the enterprise, and it all has to flow seamlessly.”

In addition to employing SOA platforms to collect information from other databases, vendors also are taking a modular approach to key ETRM components or applications. The idea is to let customers choose when it’s time to upgrade or add new programs with new capabilities.

For instance, in November 2009, Allegro introduced Hedge 8.1 to assist clients looking for a better way to comply with hedge accounting and fair value disclosure requirements.

“During a time of extreme price volatility, there may be questions about a pricing run-up. To comply with internal and external hedge accounting rules, the customer will need to document and prove the effectiveness of their transactions,” Hinton says. “That’s a complex process and this module can automate and streamline it.”

New Inputs

Of course, uncertainties remain about whether enterprise-level ETRM offerings will be able to integrate and process the smart-grid data supplied by a utility’s meter data management system, and whether there will be capability to monitor renewable energy assets and incorporate output into a carbon certificate sale or purchase analysis.

Keith Harrison, research director with Gartner’s utilities industry advisory group, says this will happen.

“Already these systems are used to trade everything from natural gas and coal to metals,” he says. “So in terms of suitability to a specific function, such as trading CO2 credits, it isn’t much different from trading any other paper-based commodity. The big concern in the United States is nobody knows what the CO2 market will look like. And you can’t sell the software until you have a market for it.”

True enough, but that isn’t stopping ETRM vendors from laying the groundwork in advance.

Ventyx, for example, has introduced a smart-grid operations solution module that processes a utility’s retail and commercial operations data, including dispatch schedules and fuel-consumption forecasts, to help optimize its generating fleet performance, given the variables that might be common to smart-grid operations.

“In the future you’ll have customer choice, and with it the associated time-of-use tariffs. That will change everything and present new levels of risk,” Crisp explains. “If I’m a utility, I want [an ETRM] system I can scale up to integrate critical-peak pricing and accurately forecast my electrical positions. Depending on the utility and market, we could be talking about demand swings in the hundreds of megawatts.”

Vendors are taking a similar view with regard to tracking and trading of CO2 certificates.

“You break it down to the commodity, location, time factors, and product evaluations and then use the risk analysis engine to create the metrics,” says Caron of RiskAdvisory. “You perform the ‘what if’ calculations by asking, ‘What happens if the emissions market goes through the roof, or if this is the legislation we end up with, a 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 CO2 certificates. After all, Harrison points out, many vendors have supplied ETRM solutions for CO2 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 CO2 position would be in the event of cap-and-trade legislation.

“The EU is already trading CO2 under a cap-and-trade scheme and ETRM vendors are offering CO2 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 CO2 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 CO2 emissions and offsets. But primary functions—such as recording transactions with brokers through exchanges or bilaterally, managing certificate inventories and producing CO2 position reports and risk analysis—shouldn’t differ much between geographies.

“Remember, CO2 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 CO2 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 CO2 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.”

Key Personnel

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 is, and always will, be Xcel personnel.

“Risk analyses are becoming more complex, so companies like ours increasingly are relying on technology,” he says. “But you still need the brain power. In risk management you find a lot of modelers, but they don’t have the utility business background. You need personnel with utility operations experience, people that know how a wholesale system works, who can interpret the data from that perspective and choose the best solution going forward. And that’s never going to change.”