Accurate energy settlements are crucial for maintaining fairness and profitability in retail energy markets, ensuring that producers, suppliers, and consumers are all properly compensated, says John Craig Swartz, SVP Risk360 at POWWR.
Energy settlements involve reconciling the buying and selling of electricity or other forms of energy in retail energy markets. They are critical for the efficient functioning of the entire system. After all, they ensure that energy producers, suppliers, and consumers are all correctly compensated for the energy they generate, distribute, or consume.
However, the process of energy settlements can be very complex. Part of the problem is that it is very difficult to track the electricity as it flows through the system. Then there are all the additional non-electricity costs and how to allocate them. Because of this, it is extremely easy for retail energy providers (REPs) to take their eye off the ball.
Forecasting and settlements go hand in glove
It is often said that knowledge is power. With energy settlements this is particularly true. Without the right information at their fingertips a REP cannot ensure they are being charged, or charging, the right amount.
Accuracy is imperative. A critical component of effective energy settlements is identifying where fluctuations and energy usage is. This is not a time for guesswork and approximation. Rather, it is imperative to get ahead of what the costs will be and forecast reconciliations before an ISO comes in to ask for it.
The reality is that mistakes happen. Sometimes a REP can be under or overbilled. It is, therefore, imperative that a REP can accurately track the energy its customers consume to ensure they are being billed correctly and only paying for the energy used. There are, unfortunately, examples of REPs that did not receive the credit they should have from an ISO because of not having the correct information. This needs to be avoided as such credits can total hundreds of thousands of dollars.
Mitigate the threat
The reality is that it is very difficult for a REP to challenge what the ISO says it has to pay. The key, therefore, is to quickly validate forecasted data assumptions to mitigate the threat of nasty surprises and ensure margins are protected.
If a REP was to price too low, it could go out of business. Price too high and it will lose customers to its competitors. It is, therefore, imperative that a REP can make informed decisions promptly, so that it can adapt to market changes with agility and accuracy. Particularly at periods of wider market volatility where it is otherwise difficult to hedge. By automating settlements, a REP can course correct its pricing quickly.
Big data mountain
Knowledge comes from information, and information comes from data. And there is more data than ever before. ISOs are getting increasingly granular with their data collection. This causes a problem, though, as many REPs simply do not have the time or internal resources to sift through this data.
Because of this, traditional methods of managing energy settlements have become increasingly cumbersome and inefficient. REPs are often swamped with disparate spreadsheets and complex datasets. This fragmentation makes it challenging for them to keep up with fast-paced changes in the market. The result is a reactive rather than proactive approach to energy settlements, often leading to missed opportunities, reduced margins, and increased risk exposure.
When tackling the big data mountain, REPs need to lean on the latest technology solutions. These solutions can reimagine the energy settlement process by integrating a variety of potential risk factors and market dynamics into a single, coherent report. This holistic approach allows for enhanced margin optimisation, more efficient risk management, and the ability to forecast future scenarios with greater accuracy.
Accuracy is everything
With margins so tight, it is imperative that settlements are accurate. The energy it buys is, by far, a REP’s biggest cost. Yet, this can only be done when every component of the chain is transparent and true.
For sustainable business practices, being able to accurately forecast usage is crucial. It is important to tie together the various elements that could impact energy settlements to ensure one version of the truth. By consolidating all relevant data into a unified platform, it provides a REP with a comprehensive overview of their operations. This integrated perspective is crucial for identifying and mitigating risks before they manifest into financial losses, as well as for capitalising on market opportunities to increase profit margins.
Being able to quickly validate pricing and margin assumptions is crucial to a REP being nimble and ensuring future profitability. It also helps them manage volatile costs that are difficult to hedge, plus track non-energy cost components – both key insights when shaping a pricing strategy.
Correct energy settlement is important for the wider industry, too. And a stable and efficiently managed energy sector is not only crucial for industrial production and economic growth but is also integral to the health and welfare of citizens.
