PUBLISHED DATE: 2023-10-19 00:36:25

How Next-generation Operating Models Will Affect Future Trading in the Energy Market

Boris Leshchinskiy, Masud Haq and Will Dusek

Executive Summary: The Future of Energy Trading

What are the challenges affecting energy companies’ ability to trade successfully in the future?

The energy market is in the midst of a transformation as the world transitions to cleaner, more sustainable power resources. Over the next several decades, volatility will define the market—and bring opportunities for growth.

Energy transition and volatility are making life more complex

War in Europe and extreme weather events in Texas have sent shockwaves across trading markets. Is this volatility a one-off incident based on the constellation of these unique, unforeseen events? Or will volatility become a new normal, magnified by energy transition and the push for carbon neutrality by 2050?

This energy transition will be different and far more complex compared to previous energy shifts. The 19th century became the “century of coal” as energy consumption transitioned away from wood. By the next century, oil had surpassed coal as the world’s primary energy source. The coming energy transition differs from past ones in a critical way: The world will not have a single favored energy source in the foreseeable future. Instead, it will depend on various interconnected energy sources (Figure 1).

Figure 1: Primary energy mix, %

The growth of hydrogen and batteries will add complexity to composite value chains and further fragment secondary energy sources. According to current projections, hydrogen will account for 11 percent of global natural gas consumption and 12 percent of electricity consumption by 2030. Similarly, battery storage will amount to around eight percent of the total renewable power capacity projected to be installed by 2030, ensuring minimum intermittency, maximum reliability and new arbitrage opportunities.

Customers will have more choice in how they power their lives, leading to more competition across commodities. Volatility could remain as switching drives swings in demand (Figure 2).

Figure 2: Energy price index, based on Jan 2020 prices, %

Organizations should revamp their strategies to remain trade energy leaders

To remain leaders and spur growth, trading organizations are finding ways to adapt their strategies across existing assets and new value pools in each of the core sectors:

To prepare, trading organizations can ask themselves two questions:

Avoid silos and redundancies by advancing operating models

Though trading organizations should continuously search for new sources of growth, they should also develop operating models to activate new value pools. Traders could look to the three-building block operating model to guide commercial positions in the future (Figure 3).

For instance, over the last 15 years, trading organizations shifted from relying on Enterprise Resource Planning to Energy Trading Risk Management (ETRM) to manage their positions since accounting-focused Enterprise Resource Planners were not equipped to handle end-of-day position reporting. Today, the need for real-time position and risk management drives organizations to adopt a modular solution architecture that is beyond the capabilities of existing ETRMs. They trade a lack of capabilities inside the ETRM for new capabilities outside it.

Figure 3: Building blocks of future trading operating model

Transform energy trading strategy with a product mindset, agile delivery and modern engineering

Organizations will remain leaders and spur growth in the coming decades by transforming their trading system architecture and activating our best-in-class operating model. These three steps are essential to a trading transformation that delivers short- and long-term value:

  1. Define an optimal strategy and operating model to understand which blocks of the existing operating model can be leveraged or built during digital transformation. It is becoming critical to design effective ways of integrating existing and new commodities (e.g., book structure, the delegation of authority and risk policies). Trading organizations of the future could deliver transformational value by combining strategy, product, experience, engineering and data, what Publicis Sapient calls our SPEED capabilities. This approach helps organizations deliver and unlock value by optimally moving from strategic alignment to execution.
  2. Adopt a product mindset to shift from “project orientation” to “product orientation” during digital transformation. Agile delivery teams are self-organizing and self-governing and operate with speed, quality and value realization. For this to happen, organizations should envision their digital ecosystem as a unique product that represents everything they stand for. Building such a product requires a transformative mindset: a product mindset.
  3. Leverage engineering and automation to accelerate deployments, control costs and enhance product quality. Engineering and automation transform people, processes and technology by breaking down silos between various teams. Collaboration is developed between roles which automates delivery processes efficiently and reliably. This deploys the “you build it, you run it” product mindset, where business and product engineering teams are responsible for the end-to-end product lifecycle, its ongoing maintenance and new solutions.

Publicis Sapient is here to help organizations navigate their journey

To discuss how to address the emerging opportunities for trading organizations and the detailed findings behind this perspective, please contact: