ETRM Software: Tools to Combat a Volatile Market
What is Energy Trading Risk Management (ETRM) software?Many companies are turning to ETRM software to mitigate the financial and operational risks of fluctuating energy prices and more rigorous regulatory requirements by managing trading-related activities for energy commodities. In addition, this software also helps address physical risks by managing functions such as scheduling, forecasting, and transportation/transmission. When implemented effectively, it also can help cut costs. How does ETRM work?Energy Trading Risk Management software increases accuracy and predictability through the use of a real-time modeling system that enhances precision and provides an accurate view of credit exposure. In addition, its scheduling component allows companies to plan, track, manage, and account for quantities of energy that must physically be moved from source to point of usage. Who is using ETRM?This software is widely used by almost every organization within the wholesale energy commodities market, and increasingly to combat steep and fluctuating energy prices and stricter regulatory requirements. Areas that utilize this software include trading, marketing, transmission and distribution, ISO (International Organization for Standardization) integration and utilities, to name a few, although utilities are responsible for roughly half of the product’s market share. While the benefits of this software extend outside energy-related industries to areas such as financial services, a good percentage of the software is still utilized within the energy industry. How has ETRM software evolved?Energy Trading Risk Management software originated in 1992 from the regulatory requirements put into place by FERC Order 636, known as the “restructuring rule,” which was designed to increase efficiency within the interstate natural gas transmission system. Since then, the software has evolved to incorporate all energy commodities. While regulatory requirements have elevated ETRM’s role from that of competitive advantage tool to a necessity in all areas of energy commodities trading, this software continues to change at a much more frequent pace than other types of software. Today, the ETRM market remains dependent on trends in the utilities industry, preventing stability in its product offerings. There are some indications of movement towards standardization, as software providers continue to improve product agility. Newer products incorporate greater scalability, flexibility and configurability, lessening the ownership and implementation costs and mitigating risks associated with integration. Better interfaces also improve connectivity, as well as support and maintenance. Energy Trading Risk Management software vendors enjoyed explosive growth last year. Even in a tough economy, the product outlook shows no signs of slowing; many software providers predict their 2008 numbers will exceed those of 2007. Overseas, the market for ETRM solutions remains immature, but vendors expect growth rates to be similar to those in North America. According to UtilPoint findings, as utilities become more self aware of risks and their implications, the market for ETRM software will improve, underscoring the industry’s increasing focus on risk management. Despite some consolidation, there remain more than 70 ETRM vendors and products—each with certain strengths and weaknesses that may vary according to the company’s unique needs. Which is the right product for your organization? ETRM software comprises a broad set of functions that can vary considerably depending on the commodities traded, the assets employed in the business, the location of those assets, and the company’s business strategy and associated business processes. A prospective user should become familiar with product research and standings, but the company’s needs should take precedence over the research in determining the right solution. With market requirements and expectations tightening, companies will continue to use ETRM software; however, the need for customization will prevent immediate vendor consolidation. By carefully selecting vendors and planning implementation, companies can apply the right solution for their needs and begin to realize the benefits—and, potentially, competitive advantage. West Monroe Partners helps organizations evaluate, implement, and use ETRM software to manage risks inherent in today’s market. For more information, please contact Nathan Nelson,
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, or Andrew Hill,
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