2021/01/25

Power Trading Companies: A Unique Trading Ecosystem for A Growing Sector

by Lucido Group

Power markets have undergone many changes over the last decade. In particular, the influence of Renewable Energy resources such as Wind, Solar, and Battery Energy Storage. These factors have contributed to an explosion of data. In this article, we cover some of the most recent and challenging complexities and how we have helped clients respond and adapt to capitalize on the technology available.

Depending on the business model there can be several interfaces to synchronize data between the ETRM and other applications. These interfaces can push data out, pull data in, or both. The timing of the interfaces can be structured to flow seasonally, daily, and/or real time. Here at Lucido Group, we have seen these system selections play out across many implementations, and our clients are able to leverage our in-house expertise to get in front of these challenges. Below is an overview of a sample power-related ecosystem as well as a quick review of some of the interfaces that are worthy of further consideration.

Example of a Utility Ecosystem

Exchange

Financial and physical trades can be transacted on an exchange. The typical exchanges that trade power is ICE, CME & NODAL Exchange. ETRMs will frequently provide ‘out of the box’ connections with the exchange, which may present its own challenges.  One challenge occurs when the Exchange updates their API, which forces the ETRM provider to rush a DLL update to all their clients. This typically happens in a short time frame on many different versions.

Price/Volatility/Correlations

Some settlement prices and Forward Marks are provided by third-party vendors and most ETRMs provide an out of the box module to connect to the pricing vendors. These connections can also have challenges. 

Some organizations may use a custom database that collects their pricing data, which often requires a custom interface.

Utilities and some Merchant organizations typically have forecasting tools that provide Forward Marks and need to be imported into the ETRM to allow the Risk Team to value the portfolio with other commodities.

Volatilities and correlations are needed for options and Value at Risk (VaR) analysis. Some ETRMs provide functionality to calculate these but are usually limited to just historical volatilities and not implied volatilities. Most Trading Firms like to have Implied Volatilities as well. This advanced reporting usually requires getting the data from either a Vendor, Optimization Tool, or Custom Application. 

Analytics/Optimization

Utilities often utilize custom or third-party vendor analytics and optimization tools. Some examples include creating forward data such as price and quantity used to value a portfolio for forward analysis and/or to determine rate case information for pricing. Firms will also calculate within their optimization tool a Natural Gas Generator, Wind Farm, Solar Generation or Battery Storage to determine the best scenario for their generation portfolio. This data is used within the ETRM system to integrate a firm’s entire portfolio.

Physical Scheduling

In North America, the majority of trading takes place within a Regional Transmission Organization (RTO), formerly known as an Independent System Operator (ISO). However, bi-lateral trading still takes place in the Northwest, Southwest and Southeast of the United States. Utilities that operate in these markets must manage generation and load through a physical scheduling application. Data such as meter reads, NERC E-tags, long term, monthly, daily and hourly transactions need to flow between the physical scheduling application and ETRM.

RTO/ISO Communication

The RTO is a not-for-profit organization that is responsible for reliability. Transactions such as Generation Offers, Demand Bids, Internal Bi-laterals, Convergence Trades, Congestion Trades and Point to Point are managed by the RTO. When a participant is awarded their Bid or Offer, this information will be provided by the RTO and these need to flow into the ETRM as a transaction. The RTO also provides invoices that include fees and energy true ups. Typically, a third-party vendor known as a ‘Bid to Bill’ system will manage this data for the client. Some clients may also choose to have a custom, in-house solution to manage their ISO data. There are various drivers for either solution.  Whether a vendor or custom solution is chosen an interface is needed to import this data into the ETRM.

Emission Certificates & Renewable Energy Credits

Emission Certificates and Renewable Energy Credits (RECs) can usually be captured within the ETRM application. However, there is usually a gap in managing the current inventory.  The certificates have a life cycle based on vintage years and this does not line up exactly with an ETRM typical start and end date.  The ETRMs have solutions that require physical scheduling functions that are not efficient for managing the certificate life cycle.  Also reconciling with the individual registries is a manual process out of the box in most ETRMs. If the client’s portfolio is large, an interface can be used to connect with the registries and automate the reconciliation process.

Accounting Systems

Almost every company will have an ERP (Enterprise Resource Planning) application to house, process, and manage accounting data which also requires an interface to your ETRM system. A standardized interface rarely exists here.

BI/Data Warehouse/Data Lake

The Power Industry, as of late, has seen an explosion in the amount of data it is required to manage due to factors such as renewable energy. Renewable energy is less predictable, motivating many RTOs to move from hourly settlement to as low as 5-minute granularity. ETRM systems are still operating on older architecture and have challenges managing the amount of data necessary to view their positions. Most clients have a BI tool, Data Warehouse, Data Lake or combination. A custom interface is usually required to export this data from the ETRM to the desired tool.  

Regulatory Reporting

Regulatory reporting is required for all firms. FERC EQR, state and other reporting requirements need compilation of data that resides in the ETRM and other applications. Compliance typically requires custom integration and preparation of reports. If you are at the beginning of your process, it is highly recommended to get a thorough picture of the solution that you will employ here and the work effort required. If it turns out to be a modest one – great news! If not, projects tend to go much better when this reporting has been prepared for properly. Gathering information on the type of customizations required, what is readily available by your ETRM system, how the data should be aggregated or separated, and what granularity your firm requires are things to consider when preparing for these kinds of important reporting integrations.

Lucido Group Can Help

Our team has decades of experience planning and implementing ETRM ecosystems, including integrations within the various Markets. If you are in need of expertise to help navigate through the many challenges with building custom and out of the box interfaces, please contact us.