Recently, UtiliPoint announced a three-part set of studies looking closer at ETRM software in North America. The Market Sizing study has now been completed and the report will be issued next week. Using both a proprietary top-down and bottom-up approach UtiliPoint estimates the size of the market for ETRM software licenses in 2006 to be within the range $78-93 million. The bottom end of that range represents our opinion of 2005 vendor license sales and the upper figure is based on top down analysis.

Defining ETRM Software

Energy trading, transaction and risk management (ETRM) software is that category of software applications, architectures and tools that supports the business processes associated with energy trading. In this sense, energy trading means the buying and selling of energy commodities such as crude oil, coal, natural gas, electric power and refined products, the management of the movement and delivery of the energy commodities and associated risk management activities. ETRM software comprises a broad set of functions that can vary considerably depending on what commodities are traded, what assets are employed in the business, where those assets are located, and what the company's business strategy and associated business processes are. Today, the impact of regulations such as the Sarbanes-Oxley Act and recommendations from the Committee of Chief Risk Officers, amongst others are having a further impact on the requirements for ETRM software.

Usually and in the broadest sense, ETRM solutions are fully integrated sets of software that help to manage the front, middle and back office aspects of an energy trading entity. Although definitions and organizational structures differ quite widely, the front office is usually concerned with deal capture and position management, the middle office with managing and reporting various risk exposures as a result of trading activities and the back office with settlements and accounting functions. Additionally, there will usually be a scheduling component to ETRM solutions allowing the energy company to plan, track, manage and account for quantities of energy that have to be physically moved from source to point of usage.

Although ETRM software functional coverage can be difficult to define, another way to look at it is to consider the types of company that need to utilize ETRM software as follows:-

o Hedge Funds trading energy commodities

o Investment banks trading commodities

o Energy merchants trading commodities

o Multinational oil companies trading commodities

o Producers selling their production

o Utilities (Investor-owned, Municipal utilities and cooperatives) buying fuel for power generation and for the sale of wholesale gas or electric power

o Local Distribution Companies buying wholesale energy to sell to retail markets

o Large commercial and industrial end users of energy

o Petrochemical and refining companies that procure feedstock in wholesale markets

Given the list of different segments of the energy industry that might require it to use ETRM software, it can be readily understood that the required functionality of such systems can be extensive. Another way to think about ETRM software is to consider the management of two primary functions across these entities. First is the business of managing the assets employed in the business whether those assets are generation facilities, produced quantities of oil, gas or electric power, and secondly the merchant function that is involved in the buying and selling of commodities and managing the associated risks. ETRM software is used to manage the merchant function and has to be fully integrated with the asset management function.

ETRM and Market Complexity

Energy Trading, Transaction and Risk Management (ETRM) Systems first evolved as modules attached to production and revenue accounting systems deployed on mainframes or mid-range computers. However, de-regulation of natural gas wholesale markets and infrastructure in the early 1990's spurred a number of new developments on a client/server platform and provided the opportunity for a number of new vendors to enter the market with packaged software products. Over the late 1990's, many of these vendors were acquired, merged or simply went out of business, leaving a smaller number of older solutions on the market that are widely viewed to be out-of-date from a technology, architecture and even functionality perspective. At the same time, many vendors migrated their solutions to new architectures to develop more scalable, configurable and functional packaged software and, a number of new vendors have entered the market with full fledged ETRM software or best-in-class modules for various aspects of the business. Today, there are still more than 71 vendors in the space.

The industry has been through a very volatile 15-year period since wholesale natural gas deregulation first created a market for ETRM software solutions. Wholesale energy markets in North America have changed periodically as new regulations were introduced; new requirements arose and, as new entrants entered the markets. An account of the history of ETRM software and markets has now been published by Vasey & Bruce (Eds), 2006[1] and will not be repeated here. However, the markets have now largely recovered from the collapse of the merchant segment of the industry and, with new regulations and corporate governance issues to the fore, demand has been high this last 18-months.

The end-user market for ETRM systems is complex and there are a many market segments open to vendors. The size of the available market is quite large in North America both in terms of the total number of potential buyers as well as in terms of companies needing to replace existing legacy systems. However, the functionality of these systems is also complex, dictated by the nature of the physical assets on the ground, type of end-user and, the evolution of the energy trading business in general. This makes ETRM software market sizing a difficult exercise that will always rely to some degree on the views of the entity preparing the market sizing.

Summary

Nontheless the method used by UtiliPoint has been used in a number of proprietary projects in the past and it provides realistic results. What is important in producing a market sizing estimate is that, for the first time, there is a third-party, defensible and independent assessment that can be used for business planning, budgeting and forecasting. Our estimate includes all types of ETRM software across all sectors and niches of the industry such as energy risk management, energy transaction management, coal, oil, electric power, natural gas and so on. However, the methodology allows UtiliPoint to break out these different components of the market and provide a size estimate for them too. Further, we have broken out the 'virgin' and replacement components of the market as well.

Given the demand that we see in the marketplace, the drivers behind that demand and the existence, especially on the natural gas side, of a number of older legacy and unsupported ETRM applications in place and new entrants in the form of financial institutions and end users, UtiliPoint sees a 15% increase in ETRM software sales in 2007 before demand begins to slow. As a result of regulations, UtiliPoint also expects that smaller energy companies will need to abandon spreadsheets in favor of systems that provide greater controls and in part, this will be satisfied through a growing Application Service Provider and hosted solution side of the vendor landscape. Finally, service firms and consultants can expect to potentially participate in an ETRM services market some 2- 5 times the underlying software market value.

The North American Market for Energy Trading, Transaction and Risk Management (ETRM) Software - Market Size and Analysis report will be available for purchase from the UtiliPoint website next week

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