New technologies and changing consumer habits mean utilities have to tear up their century-old business models – and also the systems that enable them, writes Ken Vormwald
With apologies to William Gibson, the North American science fiction writer, the future has already arrived for utility companies. The challenge, however, is how to make it spread. The cost of solar power continues to drop while consumer demand for renewables continues to rise. Highly responsive urban microgrids that optimize usage are gaining adoption. Tesla’s PowerWall product, a rechargeable lithium-ion battery for home use, promises to make in-home energy storage a reality within this decade. All these changes are forcing utilities to adopt a more distributed model of generation that all but guarantees even more disruption – along with reduced income from electricity sales given that more and more people generate their own.
With all the embedded systems being installed in homes and businesses, you would think that technology would also make predicting and pricing consumption in this new environment easier. But that is unfortunately not the case.
The truth is that all that data being sent back to the IT mothership is too much for many legacy IT systems to analyze quickly. The business insights and improved visibility of risks that big data promises are needed now more than ever, particularly to inform the trading decisions utility companies make about their supply chains. Because if changing market dynamics weren’t enough risk to manage, you now have to add the constant worry of extreme weather. The last few years have shown it to be a near constant that lands without precedent or warning, crashing generation capacity when a polar vortex or heat wave descends, or dampening demand during an extended El Niño winter.
So, how can utilities better understand the future impact of weather on both power demand and supply, manage a multiplicity of distributed generation sources, take the steps toward a distributed generation model with minimum pain and disruption, plan the availability of fuel, and deal with associated price swings? It’s a big ask, but the answer may well lie in – yes – more technology. But this time in systems that can deal with torrents of data to manage unpredictability and risk.
Demand up, consumption down
According to Exxon’s long-term energy forecast to 2040, global demand for power is set to grow by about 85 per cent between now and then as living standards rise, economies grow and the electrification of society (see mobile devices, the internet of things and the rise of wearables) continue, but also as electricity and other energy sources reach people in developing countries who currently live without power or burn wood and even animal waste for cooking and heating.
And yet, demand for fuel to produce that power is only projected to rise by 50 per cent. For that, blame more customer-owned generation and improved energy efficiency in generation and transmission. Flat or negative growth to utility revenues has been the result.
If utility companies are going to squeeze profits out of a marketplace that’s evolving fast and shifting shape, it is crucial that they find new ways to optimize their resources and reduce costs. One way to do that is to invest more in systems that provide intelligence for short-term planning issues like, for instance, unit commitment and bidding.
This is easy to say but harder to do. As an asset-intensive industry with major capital commitments, utility companies have always given emphasis to long-term planning — often conducted separately from short-term planning, and where both tend to be done in isolation from the trading desk. It is a siloed approach that blurs awareness of the market risks that arise when planning for future portfolio enhancements or resource needs. Significant cultural change may be needed alongside technological changes.
Regulatory changes are another area of extreme risk for utilities. The complexity of rules from reporting to markets, to transactions, to contracts and accounting generates special challenges in complying with the ambiguities of regimes such as Dodd-Frank, REMIT, EMIR, MiFID II and many more.
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 non-standard, structured deals in their portfolios could create new opportunities.
Further complicating matters for utilities are the ever-increasing pressures from global environmental agencies to curb and manage their carbon emissions. Proposals, such as the US Environmental Protection Agency’s comprehensive Clean Power Plan, are expected to affect carbon-fuelled generating plants around the world. Likewise, in Europe, the 7th Environment Action Programme outlines sustainability and biodiversity objectives based on low-carbon growth. Not only will utility companies need to manage the physical aspects of these new regulations, they will need to facilitate the complex process of dealing with emissions credits and potential new cap-and-trade markets.
With so many factors disrupting their business models, utility companies need to invest now in technology that can mitigate the risks they face. Management needs better and faster access to information and tools for decision-making. Without a commodity management platform, they may not be able to accurately dispatch generation, manage contract terms or pass regulatory scrutiny over feedstock purchases.
The assumption has always been that IT will provide access to the right insight. However, the industry has grown up with home-grown and off-the-shelf energy trading and risk management (ETRM) applications that may not be ready to meet the needs of today’s power and utility markets.
Spreadsheet-based applications, in particular, typically need a high level of expensive customization each time a new type of generation or fuel is added.
A robust and reliable utility commodity management solution can be applied across the entire lifecycle of power, from the acquisition of fuels to marketing and trading. It should address the full spectrum of generation profiles including natural gas, coal, nuclear, solar, fuel oil, hydro and geothermal.
And it should provide control and efficiency in the trading, tracking and risk management of physical and financial positions spanning power, fuel, transmission, ancillary services, swaps, options and structured transactions. Likewise, it should make it possible for P&Ls, volumes, risk metrics, exposures and other key indicators to be viewed on a real-time basis.
This way, decision-makers can gain a holistic and transparent view of their portfolios, capturing every detail of operation for a clearer gauge of present and projected value with integration for regulatory reporting and ISO connectivity.
In summary, a utility commodity management system should, at minimum, offer the following:
•Robust analytics, such as forecasting, simulation and optimization;
•Standardized models and forecasts to ensure consistency in analysis, with the ability to trace back model results and assess risk across power and gas portfolios;
•Forecasting, simulation and optimization analytics integrated with energy trading and risk management applications;
•Quick assurance that trades and related activities are compliant with regulatory regimes;
•Simulation of market, outage and weather scenarios fast enough to handle trading requirements.
Before you begin…
Before you begin evaluating solution providers, you should 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 to be successful.
Investing in a set of applications that integrate energy trading and risk management with analytics is an opportunity to reduce the total cost of supporting legacy systems or spreadsheets. It will also ensure that information is consistent across the whole organization, which is essential for utilities to be profitable and grow.
Ken Vormwald is Product Manager at Allegro Development.
Utilities IT survey
At the end of 2015, Allegro conducted a survey of power and utility company professionals to better understand their technology needs and the business concerns driving their IT strategies.
The survey gathered responses from more than 80 participants including executives, managerial and technical staff, and a small number of customers involved in providing electric, gas, water and emissions and renewable services. Job functions included finance, accounting, operations, risk management, trading, legal and load forecasting.
Companies ranged in size from fewer than 10,000 metered customers to more than 1 million.
When asked to rank the areas of greatest importance, more 53 per cent said improving operational efficiency and reducing costs was their main concern. Managing assets around supply and demand accounted for 21 per cent, and commodity price volatility accounted for 17 per cent. Leveraging smart grid/smart meter investments, and integration of distributed resources, including EVs, distributed generation and renewables each registered less than 10 per cent.
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 per cent of respondents ranked “increased margins: improving operational efficiency and reducing cost” at a score of 8 or better, with 25 per cent ranking it a 10, or extremely important. “Satisfying regulatory needs and pressures” scored 47 per cent 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 per cent of the time.