Energy Balance is a challenge
10.09.2018 | Author: Ilse Melotte
Big data are common in the energy sector just as in telecoms. Mass markets require solid systems, state-of-the art processes and good data management. Not only in customer processes, but also in Finance. Metering and Financial settlement processes are very long and bring major challenges to CFOs closing the financial figures.
Experience shows that within the Belgian energy supply business, finance is facing a real challenge when it comes to providing accurate and stable figures, yet really important in a small margin business such as energy supply. But finance is not on its own in charge of the gross margin controlling process.
Sourcing is often in charge of contracted margins and pricing, whereas finance is worrying about monitoring the actuals. In an optimal situation both departments collaborate well in order to understand both the theoretical Gross Margin (“ex-ante”) and controlled and settled in the books (“ex-post”). This end-to-end process on the company’s energy margins should work like a “business case”: set up and validated prior to the actual investment, and checked and controlled afterwards to see where costs and benefits were realized as anticipated. But reality is different in the energy margin landscape, why is that?
Big Data brings complexity
The whole energy industry is reliant upon a large number of complex data messages and processes. All this information is key in the gross margin closing process. Although market communications occur at the lowest level (delivery point – metering period), staff departments are having difficulties aggregating and turning data into good financial information. Reasons are: lack of rigorous IT systems and capacity, management’s unwillingness or inability to spend extra budget or lack of experienced knowledge. And that’s a risk. The financial impact of not being able to fully reconcile customer data sometimes easily runs in the millions of revenues for a medium to large B2C supplier, and even on gross margin level.
It’s all about energy balances
The majority of finance departments manage data top down, using aggregated views and assumptions to manage their financial figures. Reconciliation at a customer-level is often not possible, which leaves the CFO with unknown risks incorporated in the financial figures. This top down approach often results in a disparity between purchased and consumed energy, leading to financial mismatching.
Different energy streams follow different processes leading to different energy balances over time. Market processes facilitate full financial settlement long time after the month of consumption. Every mismatch in the energy balances leads to substantial gross margin impacts and bottom line effects.
The following picture enlightens better the financial issues underlying the energy balance closing process. An energy balance is set up per business month and per product (electricity vs natural gas):
Every energy stream (revenues, commodity, grid fee) has its own invoicing and settlement process. Mismatches between the streams, often referred to as ‘imbalances in energy’, sometimes remain undiscovered for very long times.
Then how to deal with imbalances ?
To prevent (temporary) imbalances ever becoming an issue, suppliers need to take a bottom-up approach in order to get an accurate view of their true settlement position. The market processes provide the necessary data, giving the suppliers the possibility to review gross margins per business month in a rolling window until the months are completely settled.
The simple reason that finance and sourcing departments struggle is that raw data messages come in on a transactional level. The company still needs to time slice the data in order to bring figures back to consumption months and financial years. Not an easy task because the market is charging costs to suppliers based on different slicing methods.
How then can energy suppliers correctly forecast and compare amounts and their related kWhs ? This is however extremely important to the Finance department, because the matching principle requires that all costs and revenues belonging to the same financial period should match!
So the company faces financial risk linked to long settlement processes, to mismatches in the energy balances, but also a cut-off problem. Put in other words, a lack of transparent and intelligent data management across the industry is the single biggest issue to shareholders evaluating their (return on) investments.
Classical Revenue Assurance is not enough
Revenue assurance focuses on the billing and collection processes, where the real shareholder risks start much earlier: what is the value of unbilled revenues? Does the balance sheet give a correct view on all revenues and customer related accounts ? But revenue assurance process should start much earlier. It should start from revenue recognition, making sure that billed and unbilled revenues add up to correct and total revenues for the period. From ‘revenue recognition to cash’. That’s the end-to-end process at revenues side, assuring that 100% of initially defined revenues fully get billed completely, and turned into cash.
The future market developments will add more functionality but also complexity, amongst others with the integration of smart meters. That surely will be an interesting step forward as it allows the company to identify interesting customers, but also to know the valuable customers within the portfolio when they are facing renewal.
But, the industry has major challenges ahead. Energy margins have become really narrow after years of free market competition. Sure, the devil is in the detail, well hidden in the big data sea. But in such a capital intensive business, yet so little profitable, every mismatch hits the bottom-line dramatically. Finance, sourcing and the different settlement teams have a nice challenge here: making sure that 100% of the gross margin is realized is not only a necessity but also a real nice value add to this business.