Many energy businesses are operating with a higher level of risk than is necessary because important systems do not use the latest technology, warns Adrian Bullock, Managing Director of Energy Trading and Risk Management (ETRM) solutions provider, Contigo.
He likens the situation in some to “driving a Heavy Goods Vehicle down the motorway and only looking out at the road ahead every few hours” and has released a simple check-list to help businesses judge whether their ETRM system is based on modern technology.
Adrian says: “Energy trading organisations that are using ETRM systems based on old technology or spreadsheets will often have to wait until the end of the day or even the next day to get a true understanding of their exposure across the business. The more complex the operation is, the more risk there will be and while individual energy traders will know what their portfolio looks like, they will be unable to see the picture as a whole. From a risk manager’s perspective, struggling with outdated systems can mean that the business is being exposed to risk far beyond what is necessary. This lack of knowledge can also make organisations become risk averse, leading to missed opportunities.”
Adrian argues this does not have to be the case: “There are a small number of ETRM systems available that enable risk managers and traders to see their position and assess risk in near real-time. This information allows traders to take advantage of opportunities and helps ensure that risk is managed more effectively.”
He also argues that organisations who are only getting position information at the end of the day will find it hard to compete with others who are taking advantage of intraday trading.
He says: “In my view, only the most modern systems that have intraday capabilities built into their core provide a sustainable solution. A trend we are seeing is for organisations to develop bolt-on features to their old architecture in order to satisfy the need for greater levels of granularity. However, there are many risks in doing this and the more that are added the higher the risk will become. One of these is the ability for these systems to deal with large volumes of data.
“Systems built with a modern architecture and that make use of the latest technological developments, handle this requirement differently. With Contigo’s enTrader®, for example, the system disaggregates the trade immediately at the point of trade so when there is the need to look at positions, the data is already there to view. This has enormous benefits for intraday traders who have to close positions down to the quarter hour, throughout the day.”
Adrian also argues that with the energy markets changing rapidly, organisations need to be flexible and efficient in order to adapt to this change and benefit from new opportunities. However, he says older technologies will make it much harder for businesses to achieve this. Many of the original ETRM systems, developed 15 or more years ago, are based on client-server technology and require a thick client application to be deployed on the desktop and direct database access rather than through a service layer. This architecture makes it much harder to install and upgrade new releases and makes the move to cloud based architecture very difficult.
He adds: “The new style of ETRM systems that use the most modern technology are web based, which means a smaller footprint on the desktop and a much simpler process to upgrade to new releases. They provide a service layer to make integration and client access, such as through mobile apps, much easier. It is the modern systems with smart database architectures that will be flexible, cost effective and fast enough to respond to changes in the energy market.”
Another change taking place is in the accounting rules and regulations surrounding energy trading, which are becoming more complex and Adrian argues that back office teams with old technology systems may find it hard to meet all the requirements in the time required.
Adrian states: “As rules change, many companies with old-style ETRM systems are likely to have to draft in expensive consultants or upgrades to deal with these changes. This is because many of the older ETRM systems use technology and architecture that simply make it difficult to update.”
However, he advises that organisations can protect themselves from this risk: “The new modern technology, used by ETRM systems, like enTrader®, means that they are highly flexible. As rules and regulations change, upgrades to deal them can take place in minutes, not months.”
Moving to a new ETRM system can have its own risks but these will vary considerably depending on the system. Adrian advises purchasers should ask questions about implementation times and speak to vendors’ existing clients about the process and time taken.
He adds: “Systems originally created more than 15 years ago are likely to be using old technology that can make, not only implementation lengthy but also any future upgrades a long and expensive process. This is simply because the old technology is not set up for fast implementation and is not structured in a way that makes it flexible and able to cope with upgrades. ETRM systems developed more recently have been able to take advantage of newer technology and when this is combined with a smart, easy to use architecture, such as in enTrader®, the implementations can be undertaken in a more agile process and with much lower risk to the business.”
While long implementations or upgrade processes are a risk to the business, as there is the potential to be left behind, there is also a risk in terms of the cost. Adrian says businesses need to consider not only the initial costs but what their system is going to cost over future years.
He adds: “With the market and regulations changing, there will be a requirement to make changes so organisations need to ensure that they have a system that can cope, quickly and inexpensively. With Contigo, for example, the majority of enTrader® upgrades can be done in a few hours and are provided for no additional charge, within a customer’s monthly fee.
“Organisations should also be aware that there are opportunities to enter into licensing agreements, with monthly fees, rather than one-off, up-front capital expenditure purchases. This is another way that risk to the business can be managed more effectively.”
CHECK-LIST TO HELP JUDGE WHETHER AN ETRM SYSTEM IS BASED ON MODERN TECHNOLOGY
To help organisations understand whether an ETRM system is based on modern technology, Contigo has created a check-list of ten key questions:
- Can the application be deployed in the cloud without the use of technologies such as Citrix?
- Does the application provide comprehensive Application Programming Interface (API) using modern web service standards?
- Does the application easily allow data to be imported from and exported to Excel?
- Does the application support standard SQL reporting tools?
- Does the application support an automated upgrade process?
- Does the application support access from mobile devices?
- Does the application support pre-configured market data and rules?
- Does the application support multiple time series granularities down to 15 minute intervals?
- Does the application maintain positions and calculate risk in real time?
- Can the system be easily customised to meet a customer’s specific requirements without modifying the core application code?
Adrian concludes: “A new generation technology ETRM system can make a substantial difference to risk management and business success. However, in a market where the latest technology is not used by all suppliers, determining how modern the technology is can be an important step for energy trading businesses.”
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