Three Trends In European ETRM

As we enter Q2 of 2017, three things seem to be apparent to me at any rate. They are as follows;

Deals Are Smaller
While I am hearing almost across the board that activity levels have picked up considerably, I think the average deal size is smaller. Higher costs and lower profits have meant a knuckling down and only recently has there been a slight relaxing of that as the pressures to procure have built up. With a smaller top and middle tier, many of those kicking tires are greenfield start ups or those moving from spreadsheets and homegrown ad hoc solutions as they come under increased scrutiny from stakeholders and regulators. Cloud solutions with lower entry costs and recurring all-inclusive fees are attractive to these buyers. There are middle and top tier buyers too, but they are also under cost pressures and are more likely to tinker with areas of functionality (module sales) rather than wholesale replacements. The few larger replacements we see tend to be of aging solutions that have been essentially abandoned by vendors. So, while the market is heating up, the initial projects are smaller and less lucrative than in the past. Hopefully, this is simply the early stages of a broader recovery.

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Structural Change
As discussed above, the bottom tier is growing at the expense of the top and middle tiers. Its not true to say that banks have pulled out as many European banks are still active in power markets (just check the participant list for EPEX to see this), but the larger banks and American banks have backed away. At the same time, larger integrated utilities have experienced many problems are have been engaged in restructuring and reorganizations. Many have been under significant cost pressures. The result of this has been to reduce the number of extremely large buyers of ETRM software in the market – or a reduction in the top tier. At the same time, the middle tier – your typical package software buyer – has also been eroded after several years of higher costs, more regulations and oversight and lower commodity prices. The big winner has been the bottom tier comprising smaller, niche-focused companies, start ups and so on. Disgruntled traders have left top tier entities in search of better opportunity and more flexibility often founding their own new, small trading firms. As an ex-colleague and risk manager for a trading firm told me recently, they have been able to recruit incredible trading talent from the large utilities and traders more easily than ever before. In a nutshell, the structure of the buyer market has shifted. Small firms grow larger and so this shift may be a medium term phenomenon.

Intraday Continues to be the Area of Opportunity
We have discussed intraday many times in the last months and year but as time goes by, intraday markets are expanding and continue to be attractive. More instruments, more markets, more players. This seems to be the big area of opportunity in power and perhaps even natural gas, at the moment and into the future. However, these markets move at speed. Trading 15 minute or even half hourly increments is difficult. The speed and volume of information and market signals is incredible and is already resulting in an explosion of automated trading in these venues. However, we expect to see more automation, AI, and robots used across the entire supply chain and business processes. On the one hand renewable generation and on the other smart grid and smart meters…. traders will be increasingly squeezed in between real-time signals and data from the generation and consumption sides and will need to analyze, plan, react, and communicate with increased speed.

If you a vendor that has a cloud-based ETRM with intra-day trading capabilities, you might be doing rather well at the moment…..

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