Spencer odgen power point

1

ENERGY MARKETS: A RECRUITER’S OVERVIEW

Dave Vinton

2

How the energy markets work

Upstream/ ProductionWhere raw materials are physically extracted

3

How the energy markets work

Upstream/ ProductionWhere raw materials are physically extracted

Sales/TradingWhere raw materials are sold and distributed

4

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

5

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

6

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)

7

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.

8

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

9

Trading office structure

Front

office

• Traders• Trading Analyst• Quantitative Analysts• Meteorologist

Middle Office

• Risk (credit, market, operational)

Back

office

• Settlements• Confirmations

10

“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

11

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

12

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

13

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

14

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

15

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

16

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

17

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)

18

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

19

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.

20

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)

21

“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

22

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

23

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)

24

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

25

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

26

“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

27

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.

28

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

29

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

30

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

31

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

32

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

33

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.

34

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

35

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

36

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.

37

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

38

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

39

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

40

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

41

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.

42

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.