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Putting Trading
on the Right Track
Optimisation techniques have achieved widespread acceptance amongst European gas market
participants in recent years, but, if optimisation is not truly integrated with energy trading risk
management (ETRM), then its usefulness can be undercut. How will the new integrated solution
created by OpenLink and its IRM subsidiary help traders navigate market complexity, make more
informed decisions and assist with optimal portfolio construction?
By Wolfgang Ferse & Markus Seiser
W
hile European gas markets may have attracted fire the gas and what’s the current/expected congestion?
mainstream media coverage recently thanks to the When humans are faced with a decision matrix of large
latest political flare up around Russian pipelines, dimensionalitysuchasthis,poordecisionmakingcanoftenbe
participants have in recent years faced a whole host of other the result. Assumptions and prioritisations are made – often
issues away from the headlines. Adapting to new rules and unconsciously. Consequently, sub-optimal outcomes can
competition as physical markets liberalise, navigating the sometimesoccur–even,onoccasion,forthemostexperienced
nuances of national and regional markets, and increasing and talented gas traders and portfolio managers.
trading capabilities as the role of derivatives in the market But, while it should, in theory, be a powerful tool to assist
grows more prominent are some of the key challenges that with decision making, the deployment of optimisation has,
market participants grapple with every day. hitherto, perhaps not lived up to its potential. The reason for
The European gas market includes so much uncertainty, thisispartcultural,andparttechnological.There’ssometimes
flexibility and outright optionality that a concern among decision makers that
it’s simply impossible for the human
Although some vendors have
optimisation tools are in some way
brain to successfully cope with this
complexity unaided. Given this level of
marketed their solutions as
trying to constrain their activity in an
unhelpful way. More significantly,
intractability, it’s little wonder that the
‘integrated’, in reality, the
many of the trading systems and
useofoptimisationtechniqueshasgrown integration has been optimisation tools that are widely used
increasinglypopularinrecentyears.
partial at best
are not truly integrated. This means
To get a firmer grasp of the kinds of that the two way information flow
complexity with which market participants must routinely between trader and planner or portfolio manager is limited
contend, consider the hypothetical example of a diversified and that the data and information they are using is stale, or
Italian energy and power company contracted to purchase gas perhaps not wholly consistent.
from Russia. The basic question faced by the company is: Although some vendors have marketed their solutions as
‘Should we on-sell the gas, or should we fire it in our gas-fired ‘integrated’,inreality,theintegrationhasbeenpartialatbest.
powerplants?’ Since it acquired IRM at the start of 2007, OpenLink has been
But, in order to answer this apparently simple question working with IRM to create an integrated solution that
optimally, other issues must be considered: seamlessly brings together its sophisticated cross-asset and

Will we violate a take-or-pay clause in any of our long- cross-market ETRM system (Endur) with IRM’s suite of
termcontractsand,ifso,arethefuturemake-upprovisions statistical forecasting, optimisation, planning and asset
favourable for us given our forecasts? management solutions.

When precisely does our take-or-pay contract permit While traders may not directly run optimisations
delivery and what is our ‘sweet spot’ in terms of the range themselves, insights gained from optimisations can provide a
of daily take-off permitted? powerful decision support tool for the trader – allowing them

What is current demand and are there any operational to understand the potential impact of different trading
impediments or capacity constraints to the quick fire-up of decisions. When formulated with one eye on realistic
our plants? scenarios, optimisation can provide invaluable information

We operate multiple-fuel power plants, is it economically about boundary constraints on trading decisions. The
rational for us to switch from oil or coal to gas in the philosophy at OpenLink is that optimisation should be a
current price environment? ‘decision support,’ rather than a ‘decision making’ tool.

Is there flexibility built into our contracts and, if so, where
should we take delivery of the gas? Navigating European Gas Markets

InwhichofItaly’smarketzonesdoesitmakemostsenseto To better understand how the integrated solution developed
76 worldPower2009
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