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February 24, 2020
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Energy Trade & Risk Management is a system traditionally used for trade activities and data storehouse offering operational, compliance, control, and restricted risk management functionality. It was designed with an aim to surpass in performing things like nominations, settlements, scheduling, invoices and accounting for financial as well as physical trade activities.

In recent years, the main requirements from an ETRM system regarding gas, oil, and power products has dramatically changed. According to survey, primary concern of active firms in natural gas market is operational & asset optimization. Second concern was risk management, financial operations, and regulatory compliance.

Optimization of operational, physical asset & long-term contracts

It means firms are missing prescriptive reasoning in their systems, so as to optimize long term contracts and assets. To overcome this limited optimization functions of energy trade and risk management system, several firms perform asset optimization using spreadsheets or separate apps.

Main reason behind increase in operational & asset optimization analysis is to obtain maximum asset value and long term operational flexibility for sale or purchase contracts. For optimal operating decisions models need large scale simulated and vibrant programming techniques.

Optimization-based and simulated-based models

ETRM has data connectivity tools, which allow them to handle multiple inputs arriving from different systems. However, their performance can fall short while performing vast number of calculations in simulated-based environment. For example, simulated-based models can offer optimum dispatch schedules on the basis of predicted energy market conditions, storage facilities insertion & withdrawal plans, or program long term cargo delivery contracts.

Few main benefits from optimized-based model is they help contract owner and asset enhance margins without getting exposed to extra risk, decrease operational risk, ensure all limitations get fulfilled and enhance internal harmonization across operational and trading unit.

From portfolio perspective, integration and aggregation of many physical assets and multiple contractual exposures allow to identify hidden opportunities, which can enhance operating plans.

Valuation & hedging

A demanding calculable framework is needed for creating valuation & hedging strategies because of the multifaceted nature and unshakable option clauses in physical assets operational and contract flexibilities. It is crucial for gaining a competitive advantage.

Risk management

Integrated energy trade and risk management system allows to achieve risk information from different units and take action. For example, counterparty, contract, and market information resides in different system, which is used by market team. The credit risk team also needs this information to perform EaR [Earning at Risk] and CFaR [Cash Flow at Risk] analysis. Thus, integrated system makes estimation of real-time changes in metric possible and hence respond to those changes.

Arlen Lee

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