The way we produce, transmit, distribute and consume power are being utterly changed. As in every other major industry, emerging technologies, shifting customer expectations, and now dramatic shifts in global energy economics are pushing energy utilities to rethink their century-old business and compliance models.
Transformation has arrived in the utility sector with a vengeance
Electricity no longer flows solely from large central plants fired by fossil fuels. Alongside coal and gas; 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 fracturing 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 feedback 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 power, but do it with less
Between 2010 and 2040, global demand for electricity is projected to increase by about 85% 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%. 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 optimize 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.
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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.
An explosion of data
The traditional, centralised electrical system may be shifting toward a more distributed, responsive grid driven by technology 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 utilities make and the supply chains they manage.
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 will be used 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 todays’ 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.
A utility CTRM system should at least offer 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; and 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.
Consistency of information across the organisation is key if utilities are going to return to profitability and growth. Investing in a suite of applications that integrate energy trading and risk management with analytics is therefore the approach needed to reduce the cost of supporting legacy systems or spreadsheets.
Allegro 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 53% said 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 investments, and integration of distributed resources, including EVs, distributed generation and renewables each registering 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.
Sourced from James Stirton, senior solutions consultant, EMEA, Allegro Development