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Digitisation is playing an ever more present role in energy trading. Electronic marketplaces in particular are bringing together new assets and technologies to create more efficient trading operations. We look at some of the different use cases and the potential they bring.
The changes in the European energy markets have been well documented over the last few years. There has been greater volatility, an increase in market size and a flood of new technologies and analytics to best exploit trading strategies.
With a more lucrative profile of energy, organisations can strengthen their operational setups to future-proof their revenue streams and achieve their growth goals.
Providing an environment where all trading services of an energy company can interact, brings together more assets and trading desks in a step towards more effective operating models and maximising return on capital.
Utilities have a unique set of complexities to navigate. Whilst production from physical assets is sold via fixed term agreements, their physical businesses need to be coupled by hedging and optimising these assets on the secondary market.
In this article, we will explore some of the ways that fully comprehensive marketplaces and digitization can benefit energy trading firms by providing a lean and diversified method in which to bring all their activities into one place.
Central marketplaces in trading operations have often been characterised by the principal function of netting orders between trading desks. This is only one piece of a much larger puzzle, where they can be used to integrate several different actors within organisations, each of them with their own set of unique requirements.
Utilities with multiple physical assets and multiple trading desks require sophisticated and streamlined workflows to achieve their business objectives in the most efficient and compliant manner.
Offices have become less centralised points of information since COVID-19. Whilst this more decentralized setup comes with its own challenges, it also presents a great opportunity to harness the power of digitization within organisations.
Asset Optimizers and the Rise of Renewables
In alignment with the Paris accord, Utilities have been trending towards more decarbonised portfolios and bringing more renewable assets into their energy mix. The energy system itself is becoming more fragmented and we are seeing larger scale power plants being replaced with smaller renewables assets who require the capabilities to market their production efficiently.
This influx has been accompanied by technological developments such as battery storage becoming more scalable and has required their integration with the rest of their assets in the trading portfolios.
As these types of assets have a more limited storage profile in comparison to fossil fuels, the efficiency in which these assets are optimised both individually and as a series of assets are of greater importance.
Algorithmic trading is often used to optimise these batteries with energy part fed into the energy grid and part being marketed on the spot markets. Electronic marketplaces need to be able to accommodate algorithms into their setup working with each other to maximise the resources of a series of battery assets and the trading operation as a whole.
Sales Trading and Procurement.
On the sales trading side, providing clients with a fully digitised procurement solution allows them to take control of their energy buying needs and make order edits and actions in real-time to suit their energy needs on both the spot and forward markets.
The soaring costs of energy in recent years has meant the way in which energy-intensive industries procure energy and manage risk has come to the forefront of managing overall costs. Buyers require more data and context around prices, and are more knowledgeable around what energy they need and when. This requirement for more data is now at the heart of decision-making; disseminating information such as level 2 market data to clients provides procurement and energy managers with the tools to better predict potential price changes and make more informed decisions.
Customisation of fees, markets, trading times and products can be automated to reduce manual workloads and give market access traders time to focus on revenue generation and managing risk exposures. Algorithms can be deployed to manage risk profiles of each client and optimize trading decisions based on client profiles and energy needs.
Access and security can be managed by white labelling services from third-party providers and links being integrated as part of procurement portals with a single sign on.
The ability to create synthetic order books with proprietary data enables energy providers to more efficiently market their energy assets and provide more bespoke services to their underlying clients.
Sleeving and Market Access
The case for sleeving and wholesale market access within organisations can be for a variety of reasons, ranging from geographical location, the best execution based on technology stacks or utilising strong credit. Providing trading services for subsidiaries and trading partners is often utilised by larger trading firms to leverage their strong balance sheets. This, in many cases, has historically been executed via telephone or voice rather than through a fully digitalised solution.
Centralized marketplaces allow for different levels of automation, limits, visibility and permissions for each sub customer based on service contracts whilst being hosted in one transparent marketplace. This gives full control to market access providers whilst allowing sub customers the freedom to trade in agreed parameters.
Aggregating these workflows means that risk can be more effectively managed and monitored. Efficiencies continue to be a focus with utilities looking to aggregate their trading needs with better visibility throughout organisations and transact on the wholesale market energy market.
Compliance Controls and Audit:
Robust and well-structured compliance features are what brings the whole internal ecosystem together. We have touched on the different components that orbit a marketplace, but without the correct controls and framework these cannot interact with each other effectively. Digitalisation of data is vital to ensure that the system can be managed efficiently.
As this requirement for data and analytics tools has increased in recent years, better controls around data privacy and permissions are required accordingly. This is especially the case when dealing with multiple subsidiaries simultaneously.
As digitization increases, the rigour and compliance of its associated workflows needs to increase alongside this. These are functionalities such as providing a holistic compliance view of the organisation’s internal trading universe, administration users to set value limits for risk management and Chinese wall provisions, sanity checks and emergency controls.
In addition to some of the above, Utilities must also have IT defences that can protect against constantly evolving cybersecurity threats.
Regarding transaction safety, marketplaces bringing together internal and external order books need to prevent orders becoming legged and creating additional risk exposures. To combat this, external prices, need to be removed from the wholesale market before a matching and opposite internal order is made.
Compliance Controls and Audit:
The case for the role of digitization, and more specifically, electronic marketplaces in the energy trading space presents several benefits along with providing essential functionality. To keep abreast of a contemporary energy system, utilities have become increasingly reliant on technology in all phases of the value chain.
Digitization and connecting all front office functions into one place gives more streamlined and automated processes, increased liquidity, and more symbiotic behaviour between different trading functions and assets. Wider transparency throughout organizations’ trading maximises economies of scale and creates better resource allocation to improve PnL.