The Evolution Energy Trading Risk Management 


  • Russ Meyer
  • Published: 13 April 2023

New technology can be intimidating, and the energy industry does not enjoy a reputation for early adoption. However, for leading energy companies, leveraging new technologies around data integration, data analytics, business intelligence and commodity/market-specific functionality is mandatory if they are to manage risk effectively, efficiently, and profitably in volatile markets.

For over a decade, a few prominent Energy Trading Risk Management (ETRM) systems have been dominating the energy trading risk technology space. While efficient systems, new, improved and more streamlined technological solutions have since emerged.

The ETRM Boom

The ETRM markets experienced a boom of large system implementations in the decade leading up to 2020. Global scale energy companies, national scale utilities and large trading shops looked to the largest vendors of multi-commodity ETRM solutions to replace what was often a kludge of disparate systems often comprising internally built capabilities and older, vendor supplied point solutions.

These large projects, which required license fees of several million dollars and tens of thousands of man hours to implement, would commonly take multiple years to come to fruition. And once implemented, the ongoing support of these solutions would cost hundreds of thousands to millions of dollars annually.

Given the scale of these projects and the internal disruption they create, it is little wonder than many of the largest energy companies have chosen not to replace ageing systems that have often been in place for close to a decade. Recent consolidations of the largest legacy vendors have further reduced the appetite of these large companies to invest in a new system that would likely only reap marginal improvements in technology and no discernible improvement in support.

These energy companies are well aware of the risks associated with a reliance on aging technology, and accordingly remain bound to a cycle of implementing vendor-supplied upgrades to their core ETRM solution and managing the attendant impacts on ancillary or custom components integrated with that system.

Keeping Up With Today’s Data Demands

In addition to support considerations, energy trading firms are also looking to improve their data collection and analytics capabilities which have traditionally  resided within their ETRM solutions. As price volatility increases across all commodities and the ongoing energy transition continues, energy market participants are starting to understand the importance of near real-time visibility into price movements and related market conditions.

Intraday volatility has a growing impact on asset performance and values, and trading profitability. Unfortunately, ETRM systems – most with only limited analytics capabilities – are first and foremost designed ensure accurate accounting of transactions, not provide full and rapid access to that data. One strategy employed by many of these companies is to reduce the load and the reliance on their ETRM solution though offloading key processes that are both critical to their operations and are processing intensive.

Data collection and analytics are front and center in these efforts. In particular, we have seen increased interest among energy market participants in developing data solutions like data lakes or warehouses to collect key operational and financial data from their core ETRM systems, prices feeds and other systems within and outside their businesses. Such data solutions allow them both to reduce the near constant querying of their ETRM solutions and gain an enhanced window into their operations.

This is achieved by consolidating and providing an updated view of their businesses and markets without impacting the performance of their ETRM system, particularly during peak usage periods such as daily trading/scheduling cycles. Using analytics tools, such as Python or Power BI, this data provides a rich pool of market, operational and financial performance information that enables more effective control and better profitability during the trading cycle.

New Tools, Vendors, and Solutions

As energy companies continue to evolve and move into new commodities or markets such as renewables, many are opting to look at new vendors and solutions to address those new requirements as part of their ETRM derisking strategies. In addition to reducing their reliance on a single vendor, they will often surface deeper capabilities and functionality when acquiring and integrating a product from a vendor that at once specializes in that commodity or market and provides a more modern web-based architecture.

Through integration with the chosen data solution, these firms can more easily produce consolidated financials, including PNL from multiple systems – something which often proves difficult and time-consuming via the more loosely integrated ‘best of breed’ architecture of years past.

Beyond data, analytics and commodity/market expansions, many firms are also looking outside their legacy ETRM vendors for improved risk management capabilities. Utilizing third party solutions, often delivered via the web, can eliminate these companies’ reliance on the ETRM vendor to keep current with risk management practices when addressing new risk mandates or regulations, acquiring or divesting assets, or entering new markets.

Additionally, by directly interfacing with the data lake or warehouse instead of point-to-point with their ETRM systems, they can improve processing speeds for intensive risk and financial calculations such VAR or intraday PNL, including consolidated views across their business units.

The Outlook for Managing Trading Risk

Looking forward to the next few years, we expect these trends to persist. As the ETRM vendor space continues to consolidate, energy companies will increasingly recognize the risks associated with reliance on any single vendor to support the breadth of their mission critical ETRM architecture.  Additionally, as new risk and analytics providers enter the market, the choices available for reducing that single vendor reliance will increase while the level of sophistication for risk modeling, analytics and reporting will also improve. 

We believe this will be particularly important as more organizations recognize the importance and value of risk management tools and practices that address the exposures associated with their unique mix of assets, markets, and strategies. While there are some commonalities across all companies that operate in the energy markets, it is becoming clear that a prescriptive approach to risk management is insufficient in a complex, rapidly evolving and volatile marketplace.

Our experiences working with leading energy firms have demonstrated that the most successful companies are those that leverage advanced data analytics, sophisticated risk tools and the expertise of their risk team, and who work together with experienced outside experts to develop and support a fully integrated risk management infrastructure supported by appropriate policies and practices that are aligned with their unique needs and strategies.