The risks of old technology

Many energy businesses could be exposed to more risk than is necessary because their trading systems may not incorporate the latest technology, says Adrian Bullock.

Energy-trading organisations that are using energy trade risk management (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. That is a bit like driving a heavy goods vehicle down the motorway and only looking out at the road ahead every few hours; it’s very risky.

The more complex the operation, the more risk there will be, and, although individual energy traders will know what their portfolio looks like, they will be unable to see the picture as a whole. This lack of knowledge can also make organisations risk averse, leading to missed opportunities.

From a risk manager’s perspective, struggling with outdated systems can mean the business is exposed to risk far beyond what is necessary.

Energy businesses should be looking at their systems to ensure they allow risk managers and traders to see their position and assess risk in near real-time. This information lets traders take advantage of opportunities and ensure risk is managed effectively.

Market changes

Energy markets have changed rapidly over recent years, and this change looks set to continue. Organisations are going to have to be flexible and efficient to adapt to this change, which will, in turn, allow them to benefit from new opportunities, such as large-scale power storage, that could create new trading activity. Only the fast movers will be able to take advantage of these opportunities.

However, many organisations’ ETRM systems are based on client-server technology and require a thick client application to be deployed on the desktop and direct database access rather than using a service layer. This architecture makes it difficult to install and upgrade new releases.

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 upgrade process when new releases are available. They have 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.

Rules and regulations

The accounting rules and regulations surrounding energy trading are becoming more complex, and back office teams with old technology systems can find it hard to meet all the requirements in the time available. Companies must ensure that ETRM systems can be updated quickly and inexpensively.

Changing systems

Moving to a new ETRM system can have its own risks, but these will vary considerably depending on the system. Purchasers should ask questions about implementation times and speak to vendors’ existing clients about the process and time taken.

Old technology that can make implementation lengthy, can also make 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.

Ease of use is another factor to consider when moving to a new system, and again, businesses can benefit from systems that have been designed to simplify energy trading.

Financial risk

Long implementations or upgrade processes are a risk to the business, and there is the potential to be left behind, but there is also a risk in terms of the cost. We have all heard stories of implementations that ran into years, and organisations with out-of-date systems because upgrades were so expensive.

Businesses must consider not only the initial costs, but what their system is going to cost in future. With the market and regulations changing, there will be a requirement to make changes, so organisations have to ensure that they have a system that can cope, quickly and inexpensively.

Organisations should also be aware that there are opportunities to enter into licensing agreements with monthly fees, rather than one-off, upfront purchases.

New generation technology ETRM systems 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.

Adrian Bullock, managing director, Contigo