UtiliPoint IssueAlert
Patrick Reames

The phrase “Energy Trading and Risk Management” (ETRM) would seem pretty self explanatory. It means, well, the trading of energy and managing the risk associated with the trade or trades. Right? Well, yeah, but not really.

ETRM has been adopted as a label by software vendors in order to readily identify themselves and their products to a marketplace comprised of a very diverse group of companies that transact in energy commodity products. The term first appeared more than a decade ago and was actually intended to be ETTRM - Energy Trading, Transaction, and Risk Management - implying an even broader set of capabilities beyond the trading environment, reaching out to include those systems that tracked and managed transactions that were not based upon the sale or purchase of a commodity, but rather focused on the logistics involved in managing the commodity, such as pipeline nomination systems.

As an analyst covering energy and commodity trading, including the systems and technologies employed to support the trading business, I find myself struggling with term. Because “ETRM” has achieved fairly ubiquitous usage, it’s become the default identifier utilized by many different software development houses that field systems that touch anywhere along the wholesale (and at times, even the retail) energy supply chain. Given the wide variety and complexity of processes involved in the commercial exchange of energy commodities, it’s exceedingly difficult to effectively capture in a single bucket the breadth of tools and applications that are required to meet the needs of today’s market players.

On one end of the ETRM product spectrum, you’ll find specialist systems, such as a web delivered solution that calculates Value at Risk (VaR) for wholesale energy trading books. On the opposite end of the spectrum are systems that are very broad in functionality and encompass capabilities that attempt to cover virtually every aspect of the extremely complex process of energy delivery from “source to sink”, including production management, wholesale trading, commercial marketing, contract management, position management, risk analytics, logistics, operational optimization, financial accounting, and credit and credit risk management.

Some vendors have, appropriately, narrowed the term down to more accurately reflect their competencies by using the term “risk management” system. Even within this category however, you’ll find a wide variety of capabilities. At CommodityPoint, we see the term “risk management system” applied to solutions whose capabilities involve contract management and deal capture for physical and financial products, the ability to consolidate the value of those deals to a single screen or report (position management), and finally, be able to produce fairly complex analytic metrics such as VaR or PaR (Profit at Risk). Then again, on the other extreme, we see software packages that pull in transactions from other systems (instead of direct deal entry), produce a simple position management view or report (but only for financial transactions), and provide little in the way of analytics beyond the financial position management capability and a VaR or Mark to Market (MtM) calculation related to those positions.
Beyond being able to identify a system by its functional footprint, one also needs to understand the complexities poised by commodity coverage. There a several systems available today that can capture a purchase or sales deal for virtually any commodity (either physical or financial), and can, with a fair amount of functional competency, address the unique logistics requirements of those commodities, whether they travel by barge, ship, wire, pipe, truck, plane, or train. Still other systems are available that provide the same types of broad functionality (deal capture, scheduling, position management, accounting, etc), but are more focused on managing the unique needs of a single commodity. These single commodity systems shouldn’t be viewed as less capable; in fact, it could be argued that for their specific coverage, many provide a greater depth of capability, particularly in the area of logistics, than do those systems that cover a wide range of commodities.

So what’s the point of all this? It really boils down to this - it’s very difficult for any potential buyer of “ETRM” software to understand and stay abreast with the ever changing capabilities of all the various vendors that serve this space. Despite what their marketing materials and sales staff may indicate, an ETRM system from Vendor “A” does not equal an ETRM system from Vendor “B”. Each system has evolved in a unique manner, having been developed to meet the needs of the individual vendor’s clients and potential clients in their target market, both of which will change over time. For example, Vendor “A” may have started in the wholesale power markets a number of years ago, supplying tools that allowed wholesale power traders to transact in various ISO’s and RTO’s, and only later built out natural gas capabilities in response to their market’s demands for a system that could also manage fuel procurement; and from there, it was on to wholesale gas trading and risk management. Vendor “B” may have evolved in the opposite direction, initially serving natural gas trading organizations and moving into the wholesale power markets much later. So they both currently serve the same markets, however, it’s likely that the relative strengths of their products will be significantly different, with varying degrees of “maturity” for specific functions or commodities. If you’re a buyer looking for a system to help you manage your business around, for example, the NYISO, which system would be the optimal solution? The answer may be Vendor “C”. Unless you have a gas portfolio, or plan on developing one in the next five years, you might be better off with a system that is focused only on the regional power markets.

If you haven’t had experience with those products and understand their relative strengths, it could be very difficult to discern any differences amongst the multitude of ETRM vendors based upon their sales and marketing materials. Painting the market with a broad “ETRM” brush can produce a lot of confusion for companies seeking software solutions to fit their specific functional needs. As such, it’s certainly in every buyer’s best interest to seek out expert advice and guidance as to which vendors are capable of addressing that buyer’s specific needs, and have done so successfully with similar companies. Unfortunately, many times companies seeking out software solutions will fall back to what they know and have had experience with. While that limited view may produce a “best fit”, the odds are that there is a better solution available for that particular buyer, one that provides either a better functional fit with their assets and strategies, or one that provides higher value in terms of cost vs. functional coverage.

Think of it this way - you need a motor vehicle to take you from point A to point B - on one hand you can hire a cab, on the other extreme you can buy a bus and drive yourself; both will get you there in about the same amount of time, but one is going to be a heck of a lot more expensive; unless of course you travel that route every day, and always travel with thirty of your best friends; or you may only travel the route once a week, but you may be able to pick up a couple of dozen high paying riders along the way; or you might need to carry a lot of cargo with you, or...never mind, its complicated.

CommodityPoint maintains a number of free resources to assist companies as they seek out new “ETRM” systems, including the online TRM Directory (www.trmdirectory.com) which lists all the providers of software in and around the energy and commodity trading, transaction and risk management software space along with service providers and other resources. The ETRM Community website (www.etrmcommunity.com) and blog provides additional information and news on ETRM software. The UtiliPoint Europe Blog (www.utilipointeuropeblog.com) also provides similar information, more focused on European markets.

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