ETRM vendors to change approach in face of market pressures

By Jeremy Chan | 22 September 2020

2020 looks to be a hallmark year for commodities as volatility in oil markets combined with uncertainty over future demand tests the Energy Trading and Risk Management (ETRM) solutions of businesses.

Baris Ertan, managing director of global trading and commercial lead at Accenture said in an email that in response to the changes in the energy market, ETRM providers will need to be more nimble.

“Companies will be looking to cut costs and divest spending on traditional carbon assets as they continue to invest in resources on a net zero or low carbon agenda. Technology advancements such as moving to cloud infrastructure and the application of artificial intelligence/machine learning will help propel this transition by reducing operating expense and improving decision making capabilities.”

“These technologies will sit alongside an ETRM which will cause organisations to limit ETRM solution capabilities to only the critical trade management functionality – decoupling the high-value data analytics and reporting solutions from the legacy ETRM.  We could also see the upgrade and replacement cycles reduce as clients maximize the life of their existing ETRM systems and corresponding investments.”

While the boom and bust cycle of the energy market is well-known, traditionally that volatility was caused by either a demand or supply shock. However, a confluence of events this year has meant energy commodities have faced the dual shock of a glut in supply and a severe reduction in demand.

“We have seen multiple events over the years that impacted the energy markets such as the 1986 oil glut, Enron collapse, and California power crisis. These were caused by one sided supply or demand issues, market inefficiencies and manipulation” he said. “What made the current environment so unique, was that we saw drastic erosion in fuel demand due to the coronavirus compounded by significant over-supply in oil production due to the dispute between Russia and Saudi Arabia.”

Both of these factors contributed to one oil index, Western Texas Intermediate to briefly trade in the ‘negative’ on April 21. Price has recovered somewhat with WTI now trading in the $40 range but still below its one-year high of $65.65.

ETRM providers may also face a possible future where the world has passed peak oil demand. In their most recent annual outlook, BP has predicted under a ‘net-zero’ or ‘rapid’ scenario that oil demand will never recover to 2019 levels (In a business as usual scenario, demand recovers to pre-coronavirus levels in 2025). Furthermore in a net-zero scenario, renewables could account for just under 60 percent of the world’s primary energy needs by 2050. To stay relevant ETRM providers will need to diversify their offerings said Ertan.

“The leading ETRM players will need to expand beyond oil and gas into alternative / renewable energy to support their existing client base – especially the traditional oil and has players that are pivoting to cleaner energy and renewables growth.

“We have already started to see some ETRM vendors expanding their capabilities to manage the trade capture, valuation and settlement of renewable energy financial products, solar, storage, wind assets, associated PPAs (power purchase agreements) and VPPAs (virtual power plant agreements). Furthermore, the market shift of commercial operations to renewables will cause new ETRM investments to be in tighter integration with ISO (independent system operator) market solutions.”
 

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