Maximizing value from energy assets

Energy assets such as power plants, storage facilities, pipelines, LNG facilities and vessels often represent the largest source of risk or reward within an energy portfolio. These physical assets are complex, long-lived and illiquid. For many energy companies, these assets are used as tools to produce energy, meet obligations and generate revenue. The most successful energy companies seek to maximize the value from their assets, which means lowering costs by more efficient operation of their assets and increasing revenue from trades that only they can perform.

Despite the potential of additional value in physical assets, energy companies too often lose out on this extra value because they unknowingly simplify their physical energy assets by using a “real option” model in order to fit the asset into their existing energy trading and risk management (ETRM) software. A real option treats the asset very simplistically: effectively like a call or a put option, ignoring most, if not all, of the operational aspects of the asset crucial for extracting the extra value. Although the real option model might be sufficient for the initial investment decision, these models tend to fall short during the near-term prompt and cash months. The lack of operational details and physical constraints included in these real option models, by definition, preclude any clear view of optimal asset operation or hedging activity. This sub-optimality can result in negative consequences for a company’s PnL. By introducing improved asset modelling capabilities, a company can see significant improvements to both operating costs and revenues.

An ETRM system is a must for any organization that trades energy. These systems are focused on providing deal capture, settlement and scheduling, managing curves, profit and loss reporting, and various risk metrics to ensure a company’s risk plan is followed. An ETRM system, however, is not typically focused on assets or how to extract value from them. In order to successfully accomplish this, an organization needs a complementary tool to optimize assets for the given market conditions and portfolio requirements. As mentioned above, real option models, which simplify the operational behaviour of the asset, are insufficient. In order to extract the full value from owning energy assets, an organization should use a physical portfolio optimizer (PPO), which determines how to optimally operate a complete portfolio of physical assets while meeting any contractual and system constraints.

In summary, any company engaging in energy trading with a significant portfolio of physical energy assets needs the following to maximize the value of their energy assets:

• An ETRM solution for energy trading.
• A PPO solution to unlock the full value of physical assets.
• An integration of ETRM and PPO solutions to optimize all assets and positions in the portfolio.

Find the full white paper, including the ways to maximize value from energy assest by OpenLink here. OpenLink will be at Flame Conference in May 2016 - find out more about sponsorship opportunities here.