I’m sure everyone reading this blog is well aware of the current energy market conditions – persistent low prices across almost all energy commodities, regulatory changes that have impacted all markets and continue to change in others, the influx of renewable energy sources and any number of regional or localized developments that are impacting commodity prices and the companies that operate in those markets.
With this back drop, ComTech Advisory, in cooperation and with sponsorship from FIS and Capco, undertook a research effort intended to provide insights into the impact the current market conditions are having when it comes to the value and utility energy producers, traders and marketers assign to their critical ETRM systems.
Our study, focused on the European and North American markets, utilized responses from 87 individuals, representing 80 different companies, with about 60% operating in North America (primarily the US) and the remainder operating in the wide pan-European markets. Many of these companies headquartered or operating primarily in those two regions also had operations in many other market areas including the Middle East, Asia and Latin America. In terms of companies types represented, Energy Traders, utilities, retailers and consultants were the most common, with Natural gas and power being the most commonly transacted commodities.
Lets take a look a few of the key findings –
We asked our respondents what they viewed as the greatest risk under these current market conditions – 59% of all the respondents cited Credit risk as being the largest risk. However, regionally, while the North Americans said Credit was number one, the European respondents noted Market Liquidity as their number one concern, which is a risk that ranked near the bottom for North Americans. This high ranking for Market Liquidity Risk in Europe is likely a result of the continuing deregulation in many of the markets in the region – as cross border trading increases, reliable and predictable price formation will be dependent on adequate number of traders (and trades) participating in those markets.
Moving to technology, we asked “What are the most important ETRM capabilities in current environment?” Overall, 53% of all respondents said Risk Reporting, the highest ranking of any of the available choices. However, while this was the number one answer in North America, Europeans cited “risk reporting” below “trading optimization”, and of approximately the same importance as “logistics/scheduling optimization”, “intraday capabilities”, and “asset optimization”. Again, the European respondents appear to be expressing experiences and concerns related to the emerging power markets across the continent. As the North American power markets are more mature and the various ISO’s/RTO’s operate utilizing similar models (though with a few notable differences), the issues faced by European power market participants are relatively less critical in North America, and certainly so in the US.
Next we asked “What are the greatest ETRM challenges in current environment?” 62% of all respondents noted “dispirit systems and integration” being the greatest challenge. Europeans ranked “performance and real-time capabilities” as their second greatest challenge; North Americans ranked it below “data quality and big data”
The European view regarding real-time capabilities is likely influenced, again, by the emergence and growth of the real-time power markets across the continent and across national borders…as is their third ranked challenge, Lack of Functionality. While many of the regional or national European markets are similar in their construction and operation, there is not yet a single operational or business model for the continent. As such, operating in multiple national or geographic markets in Europe does require specific functional capabilities for each.
In looking at the ability of their systems to provide valuable insights during this difficult period, we asked “Does your ETRM system help identify new opportunities?” Only 24% of the respondents felt their systems did provide this capability, with the remainder saying “no” or they weren’t sure. These results should not be unexpected given the varying capabilities of the many vendor-supplied solutions in use in both markets. For example, some available solutions provide a wealth of data visualization capabilities that may provide rapid identification of price arbitrage opportunities, or provide capabilities to model and analyze physical supply chain optionality. Solutions that compete for mid-sized and small market players are generally less costly (both in terms of licensing/support and implementation) and may not provide capabilities that help identify and respond to these types of opportunities as they arise and are quickly taken up by the market.
Additionally, the lack of alignment between trading, risk, operations and finance systems can result in different figures and prices for the same assets, requiring reconciliation and preventing companies from responding to market changes and new opportunities promptly…a result of the previously noted “dispirit systems and integration” issue.
We also wanted to examine the hot-button issue of cloud adoption, so we asked, “How likely are you to consider cloud migration due to current environment?” More than half of all respondents indicated they would be more likely to consider cloud delivery given the assumption that cloud solutions can provide a lower cost of acquisition and in some cases, a lower TCO.
In North America, where cloud has had less take-up than in Europe over the last several years, 60% indicated they would be more likely to adopt cloud to reduce costs, potentially indicating that the US market is becoming more familiar and more comfortable with the cloud value proposition.
For additional insights into the markets’ views of issues impacting price formation, ETRM system capabilities & challenges, market risks, market data, and system procurement, you can download this new report from the CTRMCenter at https://www.ctrmcenter.com/publications/reports/etrm-low-commodity-price-environment/ .
