Energy Trading Is the Nexus of a Successful Transition

The energy transition is pushing energy traders into new areas. Mindful of the need to diversify, they are moving into sectors as varied as agriculture and metals. They are dealing with a host of new products, from biofuels and sustainable aviation fuel to hydrogen, as well as the raw materials and inputs needed to produce them.

BloombergNEF calculates that meeting the world’s net-zero targets by 2050 will require metals valued at $10 trillion, primarily copper, aluminum and lithium, and also steel, nickel, cobalt, manganese, rare earths and silver, as well as silicon. These materials are concentrated in different locations than oil and gas, and varying levels of physical and market infrastructure are in place to facilitate their production, transportation and trade.

Peak demand for oil is approaching as the world works toward electrification, and it will become increasingly difficult to use oil and gas. This fast-moving market environment of bewildering complexity will likely be characterized by further volatility and uncertainty in years to come, due to conflicts, geopolitical tensions and ongoing supply chain disruptions caused by climate change.

This situation makes traders’ treasury requirements much more complex, not just because of the broader range of variables they must consider, but also because more products involve more counterparties. Treasury teams need real-time visibility across the business, and tools that allow them to execute highly accurate reconciliation. They need greater granularity in the data, so they can view individual business units or desks, rather than just look at the macro position.

With the growing number of counterparties, traders need to ensure that payments are going to verified accounts to prevent fraud. Virtual account structures, where each client or off-taker is given a virtual account that allows funds to be segregated, make it easier to reconcile transactions and increase transparency. Commodity trading tools, such as cash flow intelligence and using AI to predict cash flows based on a range of factors, can also help traders deal with increased complexity.

Traders also need to consider a new range of variables with risk potential, including extreme weather events and their impact on renewable energy generation and the supply chain, and heightened geopolitical unrest.

The power generation market moves much more quickly than oil and gas, as power is traded in real time. The dynamics of the renewables market are changing rapidly, as the production profiles of wind and solar add unpredictability, while the amount of energy storage capacity is surging. This nascent sector increasingly provides power previously generated by fossil-fuel power plants, and it is integrating new sources of clean electricity that not only have different production profiles than traditional power stations, but also are much more distributed.

Trading electrons is a vastly different business than trading molecules, and energy traders must consider factors such as carbon prices, PPAs and the availability of offtakes for power, as well as the impact of government support for renewables. Solar and wind supply can be rapidly affected by unexpected clouds in Spain or squalls in the North Sea, leading to huge swings in prices. Many traders are turning to AI and machine learning to keep track of all the variables and the huge amount of data that the sector generates.

Another factor to consider is that the markets for many of the commodities vital to the energy transition are much less liquid and sophisticated than oil and gas markets, where financial products include futures, swaps and derivatives that can help buyers and sellers hedge their exposure and reduce risk. Markets for some of the key commodities in the energy transition are still in their infancy and trade over the counter, and they may be exposed to geopolitical and supply risks that traders are unfamiliar with.

All these factors increase the level of capital trading that desks require to function effectively. Traders need working capital at their fingertips to work efficiently and be prepared for unknowns. However, it is not efficient to simply have lots of cash lying around doing nothing. Banks, such as J.P. Morgan, discuss cash management with clients, work to simplify and centralize cash arrangements and help them move money around the world to where it is most needed.

In a fast-moving environment such as trading, these are not separate conversations, but integrated discussions that take an integrated approach to working capital across both cash and trade finance. This approach helps trading desks make their cash balances work as hard as possible—putting them to work where and when they are most needed, while maintaining access to appropriate capital. It can also connect dynamic sources of working capital such as deferred payables or accelerated collections, which can be adjusted up or down as required—for example, to pay port fees outside working hours, to meet margin calls quickly or to take advantage of trading opportunities in reaction to market dislocations.

“The first step is to make sure their cash resources are visible, accessible and easy to move, in addition to flexible working capital lending solutions,” says Alastair Northway, Global Business Development Lead for Energy, Power, Renewables, Metals and Mining at J.P. Morgan. “Treasury solutions such as global, real-time cash concentration can be useful, as they allow firms to automatically mobilize and centralize funds from across different accounts and countries, giving them global access to intraday liquidity.”

New digital currency tools can help traders move money within seconds, even across borders. The speed and certainty of the process allows traders to centralize all of their cash in a single location so that they can optimize returns, instead of having to leave cash in pockets as a security buffer.

As power and energy markets grow ever-more complex, trading desks need a source of working capital that understands all the variables and their implications, and that can help them smoothly navigate, and profit from, the energy transition. J.P. Morgan Payments offers a range of tools and facilities that allow energy trading firms to optimize every aspect of their working capital operations.