How to Manage Change, Opportunity and Risk in the Utilities Sector

The article was written by James Stirton who is Senior Solutions Consultant EMEA at Allegro Development.

Disruption has arrived in the utilities sector with a vengeance, as the methods by which we produce, transmit, distribute and consume power are being utterly transformed.

Electricity no longer flows solely from large central plants fired by fossil fuels. Now, wind farms, hydroelectric dams and other renewable energy sources increasingly provide electricity to homes and businesses. Energy utilities have to manage a volatile mix of generation variables, including planning the availability of fuel, dealing with price swings and understanding the impact of weather on both demand and supply.

Technology plays a huge part in all this. Hydraulic fracturings make gas plentiful and cheap in the US, highly responsive urban microgrids that optimise usage are beginning to take hold, while embedded systems in end users’ homes and offices give a huge amount of data on individual consumption patterns.

Despite all these advances, flatlining revenue and profitability have marked the sector since the recession of 2008. Seven years on, investments in IT to manage unpredictability and risk have become more important than ever.

Give us more, but do it with less

Between 2010 and 2040, global demand for electricity is projected to increase by about 85 percent as living standards rise, economies grow and the electrification of society continues. Demand for fuel to produce that electricity, however, is only projected to rise by 50 percent. That is due to changes in the mix of fuels used to produce electricity, as well as improved energy efficiency in power generation and transmission.

The vast majority of utilities are seeing minimal, stagnant or even negative growth in their service territories as a result. Customer-owned generation from solar and other innovations has dampened demand for electricity even further, a trend that looks likely to continue. Wind and solar generation are unpredictable, coming on and off the grid and, in the absence of new energy storage technologies, require replacement power that can ramp up quickly.

The message is clear: utilities must find new ways to optimise their resources and reduce costs.

The message is clear: utilities must find new ways to optimise their resources and reduce costs. One way to do that is to bring more intelligence into short-term planning decisions such as unit commitment and bidding.

That may also require significant cultural change. As an asset-intensive industry with legacy investments and major capital commitments, utility companies put substantial effort into long-term planning. It is often conducted separately from short-term planning and both tend to be done in isolation from the trading desk – a siloed approach that blurs awareness of the market risks that arise when planning for future portfolio enhancements or resource needs.

Smart grids and the data explosion

The traditional, centralised electrical system may be shifting toward a more distributed, responsive grid driven by technological innovation and evolving customer demands. This next-generation energy system is transforming utility business models and opening up new opportunities for energy service providers.

Much has been written about 'smart grids', which are really a collection of technologies and strategies to make the grid more efficient and more resilient. Whilst their adoption is still in question, smart grids and smart meters deliver huge quantities of data that can be used to improve business insight and surface visibility of risks, particularly in the trading decisions that utilities make and the supply chains they manage.

Compliance Risks

Regulatory changes are another area of extreme risk for utilities. The complexity of reporting, markets, transactions, contracts and accounting rules generate special challenges in complying with the ambiguities of regimes like Dodd-Frank, REMIT, EMIR, MiFID II and others.

Without accurate internal audits and proper governance, utility companies involved in energy trading can be exposed to significant risk. Forward-looking traders, meanwhile, are seeing that better visibility into the nonstandard, structured deals in their portfolios could create new opportunities.

Technology to manage change, opportunity and risks

With so many factors disrupting their business models, utility companies need to invest in systems equal to the risks they face. Management needs better access to information and tools for decision making, not only for executives but also for personnel engaged in planning and trading. Without a commodity trading and Risk Management (CTRM) platform, they may not be able to accurately dispatch generation, violate contract terms, or face regulatory scrutiny over feedstock purchases.

The assumption has always been that IT will provide access to the right analytical tools. However, the industry has grown up with a complicated landscape of homegrown and off-the-shelf energy trading and risk management applications that may not be ready to meet the needs of today's gas and power markets. Spreadsheet based applications in particular typically need a high level of expensive customisation each time a new type of generation or fuel is added or a new product or instrument is to be traded.

At minimum, a utility CTRM system should offer the following:

• Integration with robust Analytics , such as forecasting, simulation, and optimisation
• A standardised system to store forecasts to ensure consistency in analysis and the ability to trace back model results or assess risk across power and gas portfolios.
• Simulation of market, outage and weather scenarios fast enough to handle trading requirements

Before you begin evaluating vendors, understand your company's strategy for hedging risk and complying with regulations in detail. Take an inventory of your most used resource analytics, but also consult traders, risk managers and planners to understand what they need in a system.

Investing in a suite of applications that integrate energy trading and risk management with analytics, is an opportunity to reduce the cost of supporting legacy systems or spreadsheets. It will also provide consistency of information across the organisation, which is essential if utilities are going to return to growth and profitability.

BOX OUT – UTILITIES IT SURVEY

One provider of commodity management software recently conducted a survey of power and utility company professionals to better understand their technology needs and the business concerns driving their IT strategies.

When asked to rank the areas of greatest importance, more than 53% said that improving operational efficiency and reducing costs was their main concern. Managing assets around supply and demand accounted for 21%, and commodity price volatility accounted for 17%. Leveraging smart grid/smart meter investment and integration of distributed resources, including EVs, distributed generation and renewables each registered less than 10%.

Asked about the issues that "kept them up at night", price volatility topped the list, with regulatory compliance running a close second. Other responses included changing technology/aging assets, the economy, weather and associated risk management.

When asked to rank their main reasons for considering a CTRM solution on which to run their businesses, 51% of respondents ranked "increased margins: improving operational efficiency and reducing cost" at a score of 8 or better, with 25% ranking it a 10, or extremely important. "Satisfying regulatory needs and pressures" scored 47% at an 8 or greater, with "the marriage of electric utilities and natural gas", "integration of distributed resources, including EVs, distributed generation and renewables", and "leveraging smart grid/smart meter investments" all scoring 8 or more 20% of the time.

Methodology

The survey gathered responses from more than 80 participants, including executives, managerial and technical staff, as well as a small number of customers, all involved in providing electric, gas, water and emissions and renewable services. Job functions included finance, accounting, operations, risk management, trading, legal and load forecasting.

While nearly half of the respondents actively traded in natural gas, more than a fourth of the group were active in coal, with the remainder involved in hydro or other types of commodity trading.

Companies ranged in size from fewer than 10,000 metered customers to more than one million with the bulk of respondents claiming more than 500,000 customers. Geographically, the group was concentrated largely in the U.S, however the themes were apparent globally.