spencer odgen power point
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ENERGY MARKETS: A RECRUITER’S OVERVIEW
Dave Vinton
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How the energy markets work
Upstream/ ProductionWhere raw materials are physically extracted
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How the energy markets work
Upstream/ ProductionWhere raw materials are physically extracted
Sales/TradingWhere raw materials are sold and distributed
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How the energy markets work
Upstream/ ProductionWhere raw materials are physically extracted
Sales/TradingWhere raw materials are sold and distributed
Power generationWhere raw materials are turned into electricity
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How the energy markets work
Upstream/ ProductionWhere raw materials are physically extracted
Sales/TradingWhere raw materials are sold and distributed
Power generationWhere raw materials are turned into electricity
Distribution/ Retail energySales and distribution of electricity
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Upstream/production
Upstream energy is where energy is physically extracted
The term comes from the oil and gas industry in particular, but can refer to any energy extraction
Includes: Oil Coal Gas (inc. LNG) Renewables (wind, tidal, hydroelectric,
geothermal, solar)
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Upstream/production
Recruitment in upstream energy tends to be the following types of candidates: Engineers – drilling, petroleum, reservoir,
pipeline Geologists and geoscientists
Recruitment in this area is specialised and requires both a suitable academic background (engineering, geoscience or geology) and relevant experience.
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Sales/Trading
Physical sales of commodities Trading of commodities – physical and
financial Trading support roles
Trading analysis Quantitative analysis Middle office – risk, compliance Back office – settlements, confirmations Market regulation
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Trading office structure
Front
office
• Traders• Trading Analyst• Quantitative Analysts• Meteorologist
Middle Office
• Risk (credit, market, operational)
Back
office
• Settlements• Confirmations
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“Front Office”
The front office is the area of a bank or energy company that is directly involved in day-to-day trading – it is called the ‘front office’ because it is market-facing
Because of this it is generally viewed as the most exciting part of the bank/energy company to work in, and candidates are keen on either front office exposure or experience
For trading analysts and to a lesser extent quantitative analysts there are opportunities to move from analytical job into a trading job if they show aptitude for it, which again makes this an attractive area
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Traders
Traders are responsible for buying and selling commodities
‘Physical’ traders buy and sell actual commodities
‘Financial’ traders trade derivatives – financial contracts that mature at a certain date. They sell these contracts for a different price before they terminate Nearly all investment banks are involved in
financial trading NB – Renewables trading is slightly different –
see clarifying notes at end of presentation
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Recruiting Traders
Traders tend to have a numerate background – often with a mathematics, physics or engineering degree
Key factors are the size of the book that they run and their P&L
Traders tend to stick within the commodity they have experience in
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Trading Financial Derivatives
Future – a contract where a firm agrees to buy a commodity for a fixed price at a date in the future (e.g. £10/ton in six months time)
Option – a contract where the firm has the option to buy a commodity for a fixed price at a date in the future
Swap – a contract where the firm agrees to swap a certain amount of a commodity for a certain amount of a different commodity at a date in the future
More complex contracts can be made which are combinations or modifications on the above
Companies make money on a future by the market price rising – e.g. If I have a future’s contract for coal at £10/ton in six months time, if the price rises to £15/ton in six months, I make a £5/ton profit when I sell the contract to someone else
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Quantitative Analysts
A quantitative analyst produces models that predict future developments in markets, particularly with regards to prices
These are highly complicated mathematical models, and the predictions from these models are what traders base their decisions on
As a result most quantitative analysts work very closely with the front office and the traders in the commodities that they cover
Quantitative analysts normally cover multiple commodities as there is a link between the prices of individual commodities (e.g. If the price of oil goes up, so does the price of gas)
Quantitative analysts are usually highly trained, academic mathematicians and top quants are in high demand
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Recruiting Quants
Need to have a strong analytical skill-set and the ability to make models
Tend to be highly numerate, often with PhDs from top French ecolés known for their quantitative mathematics
For an energy company this standard is generally lower
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Recruiting Quants
Need to have a strong analytical skill-set and the ability to make models
Tend to be highly numerate, often with PhDs from top French ecolés known for their quantitative mathematics
For an energy company this standard is generally lower
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Trading Analysts
Trading Analysts produce models to support trading decisions for trading desks
This tends to be a position found in energy companies only – it is not something an investment bank would have
A trading analyst will produce models looking at the traded markets in a certain area
These tend to be less numerate than quants, with more market knowledge (so instead of being cross-commodity, someone would be a power market analyst for example)
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Recruiting Trading Analysts
Trading analysts should be able to operate complex econometric models, so should have experience in Excel/VBA
Outside of this a deep understanding of market fundamentals is the most important criteria
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Meteorologist
Energy trading desks will often have an attached weather forecaster who looks at weather forecasts
This is because the demand for energy will be higher in worse weather (e.g. If it rains people are more likely to put the heating on), which means price usually goes up
Therefore an accurate understanding of what the weather will do is essential to trading energy (particularly physical energy, although it also affects derivatives)
A weather forecaster can also be called a meteorologist.
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Recruiting Meteorologists
The most important requirement is formal training in meteorology, preferably to PhD level but degree level as a minimum
Depending on job description they might need experience in an energy company or may have worked elsewhere (I placed a candidate into RWE from the Met Office)
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“Middle Office”
Middle Office is an area that doesn’t directly make trades itself, but sets limits and restrictions on trading. Therefore they work with the front office to set trading limits (the amount of exposure a trader is allowed to have to the market)
Middle office typically is risk analysis
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Risk Analysis
Risk analysis is split into three key areas: Market risk – calculating risk to investments
or sales due to price fluctuations in the traded markets
Credit risk – calculating and mitigating risk that a client (counterparty) will default on money that they owe to the firm
Operational risk – calculating and mitigating other risks that the firm is exposed to, e.g. Power station outages, trading system failure etc
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Recruiting Market Risk
Market risk analysts need to be the most adept at modelling out of any risk analysts, and also should have a good understanding of the market(s) that they cover
Market risk analysts also tend to be the most numerate (mostly because of the modelling requirement)
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Recruiting Credit Risk
Credit risk analysts tend to need to have experience in the types of counterparties that they deal with (e.g. commodity companies) but work cross-commodity
Experience in understanding types of transactions is needed at higher levels to ascertain credit risk
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Recruiting Operational Risk
Junior operational risk candidates can come from most backgrounds
Operational risk candidates at a higher level will just need relevant experience – academics are less essential
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“Back Office”
The back office is the part of a trading business that makes arrangements with the trading counterparties.
These are the people who confirm trades, chase for payment (settlements) and organise the contracts between the company and the counterparty.
Because back office is the ‘furthest’ from the front office, it pays the lowest (and has the least exacting recruitment standards of any area of a trading office)
Settlements and the back office are also the people who tend to interface with trading regulators such as ELEXON, who run the Balancing and Settlements Code for the Electricity Market
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Recruiting Settlements and Confirmations
Settlements analysts will need to have relevant experience for more senior roles
They will probably need understanding of trading software as this is where trades are logged and recorded.
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ETRM
Front office
• Traders• Trading Analyst• Quantitative Analysts• Meteorologist
Middle Office
• Risk (credit, market, operational)
Back
office
• Settlements• Confirmations
ETRM – “Energy Trading & Risk Management” software consultants work for companies that produce trading programmes for energy companies and investment banks
These trading ‘solutions’ cover the whole programme from front to back office, so consultants may be working with a specific office or across the whole company
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ETRM
Most ETRM companies will have their own in-house consultancy team, who implement the software for clients and customise it to their specific needs
In addition there are companies that will work with clients on ETRM solutions but are software-independent, such as Baringa Partners
Most companies will have consultants who are more technology focused, and consultants who have a better understanding of the business fundamentals
These trading ‘solutions’ cover the whole programme from front to back office, so consultants may be working with a specific office or across the whole company
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Power production
Power production is where physical commodities such as oil, gas, biomass and coal are turned into electricity
This area also includes renewable energy and its generation
Recruitment actually within power stations tends to be engineers and technicians
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Distribution/retail energy
Distribution and retail energy is the section of the energy market which involves distributing gas and electricity to retail consumers
For clarity I’ve also included operational roles in here – parts of the energy company that cover the physical operation and management of physical assets
As roles in this area require relevant experience but not many other additional requirements, I’ll not further define recruitment criteria
Retail energy is typically either sales and client relationship managers within energy companies or energy procurement consultancies, who negotiate preferential rates on behalf of a third party
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Distribution/retail energy
Operational roles within an energy company
EMC/Shift team
Portfolio Management
Fuel Analysts
Demand Forecasting
Market regulation
Operational roles within an energy company involve the running of their physical assets – e.g. their power stations, and making sure that there is enough electricity being produced or being traded to supply their retail customers at all times
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EMC/Shift Team
The Energy Management Centre is where the physical power assets are co-ordinated. In particular their role is to buy or sell electricity with the National Grid if their consumer demand is not matched with their supply. As both fluctuate, they are constantly trading.
The energy management centre also reports on power outages – power stations that are not producing power at a certain period of time, and if emissions exceed a set governmental limit.
An energy management centre works 24/7, and so most people in an EMC work shifts. Therefore EMC jobs usually have a fixed bonus payment attached.
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Portfolio Management
Portfolio Management or Portfolio Optimisation is a group of analysts who are concerned with maximising the performance of their power assets and planning any outages
These analysts analyse how efficiently and effectively the assets are performing, and plan any outages to ensure minimal disruption.
Due to the nature of this role, at a more senior level it interfaces heavily with business strategy as managers will be involved in planning the development of new assets
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Fuel Procurement
Fuel procurement is the area of operations that purchases the fuel for power stations (commodities such as coal, oil, gas etc)
They are also involved in the analysis of the amount of fuel they have – energy companies don’t want huge amounts in storage or a shortage of fuel available
Due to the nature of this role, individuals will normally have good relationships with commodity producers (particularly in coal), and there is a possible route into trading from this role depending on how much the fuel procurement team uses financial derivatives to secure fuel
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Demand Forecasting
Demand Forecasting is the area of the operational team that is tasked with predicting consumer energy usage to inform the other teams on how much fuel and power production is needed
As a result they work heavily with most of the operational team
Demand forecasting analysts look at both extremely short range forecasts (from half-hourly) to long-range, multi-year forecasts. Generally they tend to specialise in one of these areas.
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Market regulation
Market regulation is the area of the energy markets where energy companies interface with external and governmental regulators
They need to have specialist experience in this area and will work with market regulators such as Ofgem or ELEXON
Places like Ofgem and in particular ELEXON are good places to recruit people from, as they are generally paid less than they could be in a commercial environment
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Retail energy
Retail energy is the area of the energy markets that sells energy to clients
Also within energy procurement are independent firms who seek to procure energy on behalf of their clients
Retail Energy
SME Major Account Management Sales
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SME & Major Account Mgt
This is the area within an energy company that sells energy to larger clients, who want a more specialised service, and also manage client accounts
Energy is either sold on a fixed price contract (where electricity has a fixed unit price, e.g. £10/kwh) or on a flexible contract, where it tracks the traded price of energy
Larger clients on flexible contracts are often briefed on movements within the markets , so account managers will often update them on market movements
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Energy Procurement Consultancies
Energy procurement consultancies work as intermediaries for their clients, negotiating with energy companies on their behalf to structure energy contracts (normally flexible contracts)
Most energy procurement companies take a cut of the savings that they make for their clients as commission for their services
Most analysts within energy companies will need to have an understanding of market movements, particularly half-hourly/non-half-hourly markets
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Renewables Trading - NOTES
Renewables trading/carbon trading works slightly differently from other forms of energy trading.
Renewables trading has been made possible by the European Union Emissions Trading Scheme
Renewables trading is actually the trading of CO2 allowances on the open financial markets
This form of trading can involve all the forms of derivatives that other forms of trading involve.
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EU-ETS
The European Emissions Trading Scheme (EU-ETS) was set up when countries and companies were given CO2 emission limits in 1996.
Companies could trade excess CO2 production capacity with other companies on the financial markets (buying or selling depending on how much CO2 they would produce
In addition companies were able to invest in schemes in the EU and developing world that would reduce carbon emissions. They would then get a certificate that would show how much CO2 emissions they had reduced, and be allowed to ‘produce’ this much CO2. These certificates can also be traded
Types of contracts are covered in Energy Terms Glossary - a carbon trader will need to understand how all of these types of certificates work.
Other than this carbon trading does not differ from normal trading – the biggest difference is that it is certificates not physical commodities that are changing hands.