Statistics about the energy transition abound, from the collapse in European coal production, to various states’ commitments to net zero carbon emissions, including China’s target of net zero emissions by 2060. The energy transition will be a long-term process, with each fossil fuel seeing its own trajectory, and with regional variations to take into account, but energy markets are already changing – and putting a strain on ETRM and inventory management systems.
Even within physically-traded energy commodities, the energy transition is changing markets rapidly. As fossil fuel plants are replaced by or converted to “cleaner” energy sources, their inventory management, logistics systems, and the way they interact with the market all need to adapt.
LNG needs a more granular ETRM
Liquified natural gas (LNG) has grown in popularity as a “transition fuel” in recent years, with experts predicting that the market will grow at 4 times the rate of oil demand over the next 20 years. Increased supply and changes in regional demand patterns have led LNG market structures away from long-term bilateral contracts towards much more flexible short-term or spot trading. 34% of global LNG trade in 2019 was on a spot or short-term basis, compared to 27% in 2017.
This market development presents power generators with greater flexibility, the ability to capitalise on favourable price changes and better optionality, whilst traders and suppliers benefit from more arbitrage opportunities. The development of a commodity market for LNG has also provided access to derivatives and financial tools that can mitigate some of the risks of these markets.
Players in these LNG markets therefore need to be able to manage more contracts and counterparties than before and to move more quickly. They need the reporting and data tools to match this higher contract volume to derivatives for effective risk management, manage multiple currencies and utilise real-time MTM and P&L reports, which may include some new capabilities for utilities procuring LNG.
Logistics and inventory management systems also need to be better-able to handle complexity. As well as the additional technical stages such as regasification, with a higher number of smaller contracts it becomes more important to be able to trace power back to the terminal, shipment and ultimate source on a case-by-case basis.
For LNG traders managing multiple shipments to an increasing number of clients and with more terminals to choose from, getting a complete picture of this optionality, understanding exactly where cargoes are and maintaining certainty over tank and storage capacities is both essential for core operations and a means to improve efficiency for greater profitability.
Biomass wood pellets and ETRM
Another commodity gaining ground in the energy transition is biomass, expected to grow at a CAGR of 6.12% through to 2027. Biomass has its own logistics and inventory management challenges, particularly for generators, as its lower net calorific value (NCV) and lower density than coal mean that larger volumes are needed to generate an equivalent amount of energy.
As well as requiring more shipments, biomass storage creates more challenges, as moisture and decomposition affect quality and can cause a dangerous build-up of CO2. It’s therefore important for traders and utilities to be able to log assays following inspections, know the conditions their stock is stored in and how long it has been there, quickly and easily.
This information needs to be in a digital format, and one that can be shared across ETRM and ERP systems as most generators are subject to regulations governing carbon dioxide emissions and the percentage of fuel from sustainable sources. Each shipment entering the boiler therefore needs its own audit trail, relevant certification and lifecycle carbon emissions for regulatory purposes, not to mention assay management to prevent residue build-up and the usual range of operational and financial risk management.
Hydrogen – the next commodity market?
We are already seeing strong growth in established markets for LNG and biomass, and hydrogen may not be far behind. Current investments in hydrogen are still frequently experimental or not expected to be profitable without government support. However, many are expecting hydrogen to play a role as a transportation fuel in the near future, with some predictions of it reaching up to 20% of some countries’ energy usage by 2050.
Global hydrogen demand is growing, with expectations that the EU will require around 17 million mt a year by 2030, nearly 75% of which would need to be imported from outside the block. And if there is demand for a global hydrogen market, the recent lessons from the successful development of the LNG market could help this new commodity gain rapid momentum.
Supply chain management and carbon accounting
Carbon accounting is already beginning to appear in some commodities, such as biomass power generators needing to provide lifecycle carbon dioxide data to regulators, and other energy commodities will likely also need more granularity in their carbon reporting in the near future. Transactions may need to quote carbon footprints on invoices or other documents, and this would need to be calculated through the supply chain as they change. Inventory management and supply chain traceability therefore need to be a core part of any commodity management process, and baked into the technology organisations use.
At Gen10, we have always prioritised Commodity Management over C/ETRM and provide software solutions that include logistics and inventory management as standard alongside the automated risk management that is expected of a modern cloud ETRM. Our solutions allow you to trace stock across your supply chain, updating assays and carbon emissions as needed, with complete certificate management and a full record of any changes; across tanks, transportation and warehouses, including splitting or merging stock. The automated pricing engine includes the ability to add carbon accounting, alongside creating invoices and other documents, and integrating with accounting systems.
The energy transition is changing the way all energy commodities are managed already, and lifecycle carbon measuring and accounting is among the major upcoming challenges the industry is facing. Gen10 have spent the last 20 years developing flexibility and granularity in our systems, which are developed specifically for a range of commodities, and pride ourselves on giving our clients the ability to manage their inventory from the smallest units to the largest shipments. Whatever the energy transition will mean for your business, Gen10’s commodity management solutions can help you prepare for it.
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