It is evident that oil and gas majors are embracing the energy transition. Whether that be Shell’s ‘Powering Progress’ or BP’s “Performing while Transforming”, they are all facing some common challenges.
In a world of “low carbon electricity and energy” or “convenience and mobility” – balancing electricity is very different to the traditions of oil and gas. The systems that have served these companies well in the past (the traditional ‘ETRM’), are not going to be fit for purpose for prompt trading in the new ‘de-carbonised’ world. Such systems were primarily designed to capture value and manage risks in long-term markets (trading weeks to months ahead).
Oil and gas companies that are venturing into power will find that they cannot ‘shoe-horn’ short-term physical power trading into existing ETRM systems. Furthermore, the trading desks of oil and gas companies are more accustomed to working on timescales of days and weeks, managing the risks for next winter, not now.
Oil and Gas majors expanding into renewables will need to reset their focus to become winners in the short-term trading markets. Far less longer-term fixed-price trading will be required. Instead, PPA risk premiums, shape trading and imbalance management will all occur in the final 48 hours before delivery of power. Short-term trading doesn’t require enhanced credit risk monitoring, long-term VAR calculations or daily position reporting – the pace is completely different.
In this article we explore the trading landscape of oil and gas majors from an energy balancing point of view and how they can adapt to the changes.
Background to Electricity Balancing
To supply electricity (and to generate it) you simply balance what you sell (or consume) with what you buy (or generate). It would be onerous to balance these opposing forces down to the millisecond, so instead you balance your production and consumption based on the average usage over a fixed time-period. These time-periods are based on the types of generation in the market, the inertia (weight) of the system and regulatory policy.
In GB, electricity must be balanced for each half-hour period, in the Nordic region it’s currently 1 hour but this is moving, under European harmonisation, to 15-minute intervals. For gas markets, the periods are typically longer (GB is daily) as the Linepack (pipes of gas) offers a huge buffer to the impact of supply not equalling demand. The impact of not balancing is that you pay a premium price for the electricity you over-consume or over-produce.
So to put this in context, imagine that in a supermarket every half an hour all the loafs of bread disappear. The supermarket would have to bake exactly the same number of loafs as those sold in each half-hour of the day, otherwise they would lose excess loafs at full cost or even worse, have to buy shortfalls in loaf sales from a competitor plus a delivery premium. I am sure the supermarkets are happy that bread is storable and moves seamlessly from one hour to the next!!
What the Portfolio of a Present/Future Decarbonised Oil and Gas Player might look like
The Oil-Co of the future will have an electricity portfolio that consists of:
- Domestic supply to homes with solar panels, batteries and electric cars that can smart charge
- Off-take agreements on wind and solar generating plants
- Fleets of grid-scale batteries (football pitch sized) helping them to balance
- Forecourt rapid charging for electric cars on the move
- Industrial and commercial customers with large self-generation capabilities and processes that can be interrupted if the price is high
- Constraints being placed on them from the 14 DNOs (GB) telling them that, even if they have balanced their electricity usage there’s not sufficient copper in the low voltage networks to get the energy to the customers
- Interconnected flows of energy from other countries
- Prices moving up and down continuously as automatic trading bots hunt value and trade power continuously
Thus, on the Oil-Co Power trading desk your mission will be balance the current half hours electricity at the best price, whilst factoring for uncertain variables that include:
- People at home use energy when they want
- The wind and solar forecasts are not fully accurate
- People charge their cars when they are low on range
- If all your customers plug their cars in at the same time the distribution system operator will switch off supplies
- Prices are moving faster than you can think
In an environment of shortened timescales for trading, where longer-term fixed price trading is less relevant, (as the penetration of renewables is usurping the traditional asset profile), if you want to win, your focus will be on PPA risk premiums, shape trading and imbalance management. These all occur in the final 48 hours before delivery of power.
Short-term power trading requires positions to be up-to-date every second. The positions need to be tracked for risk control purposes. Risk management needs to be embedded into the trading and position reporting tool. Tools that do this well don’t exist yet and definitely don’t exist in the existing longer-term ETRM suite.
With this new focus on short-term power trading, Brady is developing PowerDesk. PowerDesk will centralise all those feeds of information, forecasts and their uncertainty, price movements and recommend the optimal way to schedule your battery. PowerDesk is designed for the modern electricity markets where the world has moved to real-time. In PowerDesk:
- Positions will be monitored in real-time so you are always up to date
- With innovative visualisations of your risk exposure you will know how much to buy and at what price
- You will be first to market as algorithms can automate your trading
- It won’t help you balance loaves of Bread…
Written by Chris Regan, Product Director, Energy Portfolio Brady Technologies
As an energy trader, Chris was present at two market openings before heading up EDF Energy’s Trading and Operations capabilities between 2009 and 2017. As Vice Chair of the Power Trading Committee and Chair of Energy UK’s Wholesale Markets subcommittee, Chris helped create the current Energy market we have today, making changes to the energy trading products, negotiating the mandatory market making rules and making changes to allow customer’s assets to be re-optimised closer to real-time.
In 2017 Chris delivered a distributed trading capability (Powershift) into EDF, allowing customers to access markets alongside EDF’s own fleet of power stations and batteries. EDF’s Powershift is now a leading player in the UK flexibility market, optimising batteries, engines and DSR on behalf of EDF’s customers and is part of the international group’s flexibility offerings.
At Brady, Chris is now leading on the delivery of a short-term power trading SaaS platform. Brady’s PowerDesk solution will allow energy traders to operate in this new decarbonised, intermittent and decentralised world of energy trading.
Chris has a background in Physics and complements this with an MBA from INSEAD.