Energy companies worldwide are facing widespread change. Traditional business models are being up-ended as companies seek to drive growth while also containing indirect costs. This situation has big implications for the future of settlement operations. It’s time for settlement teams to leverage the power of digital settlement.
Major changes are underway in the global energy marketplace. Three trends have significant implications for settlement operations as energy companies and trading entities work to drive business growth.
Growing Demand: While the numbers vary, experts project overall growth in the global demand for energy(1). Demand for oil is being driven by greater consumption from the petrochemical, trucking and aviation sectors, along with a potential supply crunch. Increased consumption in Asian markets, particularly in the industrial sector, is driving the globalization and increasing demand for natural gas. Electricity markets are also under pressure with higher demand being driven by increasing electrification in transportation, buildings and industry.
The Rise of Renewables: Renewables are projected to be the fastest growing energy source, supplying 40% of demand by 2040(2). The power sector is already working to integrate distributed energy resources (DERs) and smart micro-grids. It’s a shift from the model of owning assets and driving return on those assets to one that focuses on creating more products and increasing service volumes to create margins.
Proliferation of Data: Growing demand, the transition to clean energy and an increasingly diverse fuel mix will incentivize energy companies across all sectors to develop more products and entice new competitors to enter the market. At the same time, regulatory policies will require increased reporting. This translates into more data—more trading, scheduling and invoice information to be reconciled; more compliance reports to be generated; more opportunities to generate insights to better manage cash flow.
These trends collide on the desk of the settlement analyst, resulting in both a higher number of transactions to process and a larger amount of data to reconcile. The mandate for settlement is to efficiently complete the settlement process to support growth without increasing back office costs.
The implications for settlement raised by the market trends are compounded by the current state of settlement operations, which are characterized by a reliance on paper-based information exchange and a complex manual reconciliation process. In my conversations with financial executives, I repeatedly hear the same questions.
How Do We Defend Against Cyber attacks?
Many companies in the energy trading community still invoice their counterparties via email. The invoice is manually attached and often sent from a shared settlement department email account to a pre-populated email address for the counterparty. Email invoice delivery is fraught with risk.
- A lack of security controls. Email accounts are often shared, meaning access may not be secured. Senders have no way of knowing who can access the sensitive information that’s been sent.
- Out-of-date information. In today’s rapidly changing business world, it’s tough to maintain a current list of counterparty contacts. Sometimes, the only way to find out if an email has been sent to an invalid contact is when it bounces back.
- No audit trail. Even when an invoice is accessed via email, there’s no way to know who retrieved it, or when. Similarly, if an invoice is modified in any way, there is no record of that change.
Hackers can easily exploit email correspondence, sending electronic invoices from what appears to be a trusted counterparty. The banking information and payment instructions, even on a PDF invoice, can be effortlessly changed, and the payment diverted.
How Do We Get Earlier Warning on Payment Breaks?
In the energy sector cash flow forecasting has always been an essential business process. But in today’s increasingly volatile energy market, cash management and forecasting are increasingly critical for decision-making. In fact, 80% of financial professionals agree the role of treasury will become even more strategic over the next 3 years(3).
Many energy market participants settle using a manual paper-based information exchange. The settlement team is challenged to provide early warning to treasury if a counterparty is going to dispute a transaction or short pay an invoice. Financial executives are looking for a way to eliminate the cash flow black hole. The settlement process must provide treasury with a clearer picture of settled transactions and potential payment breaks daily.
Getting visibility into the status of the settlement process enables treasury to work with their banks to ensure adequate liquidity and the opportunity to invest any surplus in an investment instrument with better interest than the standard bank account.
Is There A Practical Way to Adopt Digital Technology?
In the energy trading industry, finding ways to improve post-trade processes, including settlement, is a top priority for companies eager to reduce costs. Energy executives are exploring how digital technology can help their settlement teams respond to the changing market and position them to support rapid growth. This includes technologies such as cloud-based platforms, robotic process automation, AI, natural language processing, machine learning and blockchain.
While it’s easy to see the benefits, it’s much harder to see an approach for adopting next generation technology that doesn’t disrupt the settlement process. The path forward will likely be a series of smaller incremental steps – rather than an industry-wide leap – that allows companies to:
- Gain clarity regarding the practicality and time horizon for when specific emerging technologies will be viable as mainstream technologies for energy settlement.
- Realize the benefit of emerging technology adoption without the requirement for IT investment and process redesign.
- Implement a solution that enables processing and collaboration with all counterparties regardless of their ability to implement new technology.
If your settlement department is still working with manual, paper-based processes and exchanging emails with counterparties to settle invoices, you have a significant value creation opportunity. The digital settlement department settles more transactions, increases security, reduces risk, simplifies compliance reporting, and improves cash-flow management.
By digitalization, I mean the conversion of analog (paper-based processes) into business processes that leverage technology innovation. Here’s my view of the six key characteristics of a high-functioning digital settlement department.
Secure. Access is restricted to authorized users, an audit trail of all settlement activity is automatically created, and all documents – including invoices – are delivered and stored on an encrypted platform.
Transparent. Settlement progress and status is visible to all authorized users. A central repository of settlement data provides real-time visibility into invoices, payments, messages, disputes, adjustments, fees and supporting documents.
Collaborative. Internal and external stakeholders work together in real-time to reconcile settlement discrepancies and breaks. All counterparties can communicate, match with counterparties daily and share supporting documents until tie-outs are completed and payment is approved. Counterparty contact information is accurate and current.
Standardized. Consistent workflows are followed on a single, cloud-based platform. Complex settlement information is organized and presented in a consistent format across all counterparties.
Automated. The exception-driven process provides early warning on transactions where action is needed and automatically advances transactions without discrepancies. Analysts receive real-time notification of counterparty activity.
Analytical. The digital settlement process generates insight on cash flow exceptions across multiple commodities, accurately predicts future cash flow breaks, tracks payment breaks and disruptions, and simplifies audit and compliance reporting.
Two stories from our customers show how quickly companies can realize significant value from digitalizing and automating settlement.
Making Time For Higher Value Tasks
A large energy provider wanted to simplify a manual workflow, reduce the stress of using manual processes to resolve discrepancies, and improve the quality of their analysts’ work life. The company quickly recognized the value of having their counterparties’ communication and documentation organized on a secure, collaborative and cloud-based network. They chose ESN to streamline their energy settlement operations.
During their first week on the network, the company received an exception notice from one of their counterparties. The company used ESN to document the exception, collaborate with their counterparty, and resolve the break. A settlement process that would have typically taken days of elapsed time using a manual process was resolved in an hour. The settlement team now has more time available to focus on higher value tasks, adding more value to the company.
Supporting Business Growth
A global energy company was experiencing rapid growth as they built out their book of business, but there was a mandate to support business growth without growing the back office. After their analysts experienced the ease and operational efficiency of settling on ESN with a few counterparties, they quickly recognized the value of settling with all their counterparties on a secure platform that would easily scale to accommodate their future growth.
The company now has seamless collaboration between their settlement analysts and their counterparties. Their analysts can identify exceptions well in advance of invoice due dates, allowing the settlement team to operate more efficiently and with far less stress.
Digital tools, like ESN, are helping energy companies and trading entities optimize their settlement processes, simplify compliance reporting, and secure their transactions. Now’s the time to embrace digital and future-proof your settlement operations.
About the author
Jeffrey K. Wagner is the CEO & Founder of Aquilon Energy Services. He has over 25 years of experience in technology innovation and leadership. Mr. Wagner is based in Lisle, Illinois.