Deep or Wide? Where Should ETRM Head in 2008?
By Louis Caron, RiskAdvisory and Ross Graham, SAS Canada
DISCLAIMER: This article first appeared in the end of year 2007 issue of Risk Desk, and is reprinted with the permission of Scudder Publishing Group, LLC www.scudderpublishing.com.
Last year RiskAdvisory and SAS predicted in these pages that all companies involved in energy markets would demand higher levels of data analysis for the purpose of forecasting market conditions and creating better reports. The forecasts and reports are needed by senior management to enable more timely responses to volatile conditions that offer the opportunities for profits.
Based on our conversations with chief risk officers at various companies this year, we stand by that prediction of need and we believe it will be a continuing trend, particularly in Europe and South America, regions where we are currently intensely engaged with multiple companies.
But the broader ETRM software vendor sector seems to be headed in a different direction. In 2007 our competitors purchased smaller software vendors with wider energy risk management capabilities.
For instance, one UtiliPoint report in June noted that “Recent acquisitions in the ETRM space clearly indicate that many solution providers are moving to broaden their presence outside of the “traditional” ETRM model, seeking to service an ever increasing portion of the energy value chain. While the market for wholesale energy trading and risk management systems remains strong, areas adjacent to this market are showing similar strength and have drawn the attention and dollars of the ETRM vendors.”
RiskAdvisory/SAS did not move in the same direction as its competitors. For our part, we put stock in the comments of the chief risk officers we work with on a daily basis. Based on our discussions with them, we see a different picture, one that’s more in line with our 2007 prediction of continuing demand for greater analytical capability.
For instance, Calpine CRO Gary Germeroth told us they are challenged by the complexities of evaluating 20 co-generation plants and combined-cycle generating units and modeling generating units that are often the marginal price setting units in the markets.
“Ultimately,” Germeroth told us, in an interview for Electric Light & Power , “the goal is to build an infrastructure of analytical tools and systems that actually helps make better decisions in shorter timeframes.”
Ultimately, that is our goal as well: better decision making in shorter time frames. We think that
going deeper at this juncture of energy markets’ development is the right move and our investments in new versions of ETRM trade capture and analytical software will be headed in that direction in 2008.
By contrast, as UtiliPoint notes, our competitors are feverishly working to integrate their acquisitions into their mother suites – a task that takes time, money, and a lot of frustration for their customers. While good for the vendor, such activities are only marginally good for the customer.
European Demand Will Continue to Soar
Beyond the internal development of the ETRM sector, there are external forces driving ETRM growth, particularly in Europe and South America.
In October, UtiliPoint produced a study sizing the European market for ETRM products at 15 percent annual growth rates. In response to the UtiliPoint survey, some 23 percent of companies said they expected to procure new ETRM software within the year. UtiliPoint found that growth is due to “a variety of factors including EU market liberalization, new entrants into financial energy trading and emissions trading amongst others.”
Indeed, deregulation of European wholesale markets is driving strong demand for trade capture and analytical software. The software is stronger than ever, having been developed in North America over the last 10 years, astride several market catastrophes that instructed and informed further software development. Risk is the same in Europe as it is in North America, but understanding how to capture and analyze its components has been refined through trial and error as experienced in the northeastern United States in the late 1990s and in California in 2001.
South American Demand is Different, But Steady
In South America , strong economic and population growth are requiring exacting risk management and mitigation, to reduce the strain on existing physical assets while new generation is brought on line. The government in Brazil for example is encouraging the development of an energy market that will attract external investment in power plants to meet the economy’s energy-hungry growth. Actually the demand for ETRM is driven by the need to track risk resulting from competitive energy market forces, but also by the fact that companies don’t know when new generation will be brought on line. Companies are more willing to invest in ETRM tools there because the cost – and political risks – of building new plants make that option the most prudent.
Again, risk is risk, and South American companies will share the same benefits as European companies gaining the experiences and resulting software development arising from North America ’s past problems.
Customer Service is Name of 2008 Game for ETRM
EnergyRisk Magazine’s 2007 ranking of software vendors also confirmed our prediction that companies will be looking for greater analytical capabilities for their data. Our software’s modeling capabilities was widely regarded as being among the best by reviewers. We owe a lot of that perception to the expansive SAS footprint – with more than 120 offices worldwide we can deliver hands-on instruction to most clients, a key consideration for fully utilizing a software solution. As the EnergyRisk magazine ranking detailed, customer service is a big issue to ETRM customers. Going deep into the data can be achieved with onsite customer service.
2008. A Different Year?
As the ETRM software sector matures, we’re likely to see more consolidation as software CEOs see opportunities for capturing more market share within the energy vertical. But the question will remain: Is the industry best served by consolidated software offerings or software that is more capable of delivering in-depth analysis for the purposes of forecasting and reporting? We predict the latter for 2008 and believe our investments in such tools as RiskAnalytics Workbench, a graphical solution for the risk, credit and business analyst. Industry conditions will continue to demand that analysts have simple, easy to use methods of accessing data in almost any format, whether that’s Excel, a relational database or proprietary datastorage. Business analysts will be removed from the complexity of the underlying data architecture and therefore able to access the data they require for analysis.
The advantage of going deep, instead of wide, is that there is no time lost in integrating once disparate products. Acquisition of other companies’ software into a mother company’s suites takes time. Witness Oracle and its acquisitions of PeopleSoft and countless other companies into its E-Business Suite.
By contrast, Workbench accesses the required data, analyzes it, cleans it and normalizes it to leverage thousands of statistics already built into SAS software, performing analytics and creating business models. Workbench also goes deep by providing integrated functionality to build distribute and schedule reports and analytical models within the enterprise to a variety of audiences. The deep implementation of existing, correlated software delivers flexibility with none of the traditional risks of maintenance, complexity and errors, especially those supplied by integration of two formerly non-integrated proprietary software systems.
In sum, the industry will be better served by going deep instead of wide in 2008.