Energy markets are complex, but understanding how they work doesn’t have to be. Whether you’re new to the industry or just want to deepen your expertise of how trading and risk management fit together, this post will walk you through the fundamentals.
We’ll look at what energy trading actually involves, how to think about risk in this space, and where technology (like ETRM systems) comes into play. Along the way, I’ll share my perspective on how PCI helps streamline these processes and supports better decision-making.
(If you want to see how these concepts come together in practice, take a look at PCI’s Energy Trading and Risk Management platform, which supports the full trading lifecycle from deal to cash.)
What is energy trading?
Energy trading consists of two parties agreeing to exchange a commodity (electricity, natural gas, crude oil, etc.) for an agreed upon delivery date and price. Trades can span as little as five minutes (electricity) or for a year or more (crude supply contracts). The time horizon of trades can be viewed in three buckets:
- Baseload: Consistent, long-term trades to ensure asset stability based on historical need
- Day Ahead: Incremental purchases and sales to supplement baseload activity for the next day based on projected needs
- Real Time: Day-of purchases and sales to address sudden changes in supply and demand due to changing market conditions
In each time horizon, you’re evaluating forecasts, supply and demand, asset constraints, and market conditions to ensure asset reliability while minimizing costs and reducing risk as much as possible.
Learn more in our blog post, “What Is an ETRM System and How Does It Work for Power Companies?”
What is risk management?
In order for risk to exist, uncertainty and exposure must be present. In energy trading, the uncertainty of future market conditions combined with holding open market positions means that every trade carries some level of risk. Here are a few common types of risk encountered in the industry:
- Market risk: Exposure to changes in commodity prices, exchange rates, and interest rates
- Credit risk: The possibility that a counterparty fails to pay on its obligations
- Operational risk: Errors or failures in systems, processes, or manual activities that impact performance or accuracy
A good ETRM platform should help surface these risks quickly. One way that PCI addresses that is by making it easy to import market data automatically — no copy-pasting, no delays. It’s just there, ready to go and allows users to focus on analysis and decision-making, not scrambling across spreadsheets. Our tools help reduce that manual burden and minimize the risk of user error.
Video caption: Joe Frick, product manager for Fuels ETRM at PCI Energy Solutions, explains how PCI helps teams monitor market, credit, and operational risks in real time — and why automation makes all the difference.
To help manage credit risk, PCI allows users to assign external or internal credit ratings and set exposure limits for each counterparty, making it easier to monitor obligations and prevent overexposure. Market risk is addressed through various reporting functions such as Mark to Market and Value at Risk (VaR), giving users visibility into current positions and potential portfolio impacts. These reports support faster and more informed decision making.
What are the key steps in the trading and risk process?
Here’s how I think about the trading and risk lifecycle:
- Market analysis and forecasting: Combining historical data and future trends to develop a trading strategy
- Trade execution: Negotiating and executing trades to meet demand
- Scheduling and operations: Managing the transportation of commodities to their destination, addressing transportation constraints, and resolving imbalances; for fuel commodities, this could also include storage or inventory management
- Settlements: Validating internal records with external invoices, generating reports, and processing payments
- Risk tracking and compliance: Continuously monitoring risk while ensuring compliance and audit-readiness throughout the lifecycle of the trade
Each step in the trading and risk process is interdependent, requiring seamless coordination to ensure efficiency and minimize risk.
Why do companies use ETRM systems?
A strong ETRM system provides a single source of truth across the energy trading lifecycle, helping teams manage each part of their workflow with greater accuracy, consistency, and confidence.
Energy trading is complex, and spreadsheets, email threads, and in-house tools can only take you so far. An ETRM brings structure to a fast-moving, high-volume industry.
It’s not about tearing down what already works. It’s about removing the friction from what doesn’t. The right ETRM fits into your existing processes and scales with your business as you encounter new ones. It gives you the tools you need to stay ahead as markets shift, and new challenges emerge.
Video caption: Joe Frick, product manager for Fuels ETRM at PCI Energy Solutions, shares why the fear of switching systems is common — and how a seasoned ETRM provider can help teams grow with confidence. Want to hear more from Joe? Watch the full Hot Takes video where he walks through key energy trading risks and how systems can help teams manage them more effectively.
Supporting smarter decisions with a single system
At PCI, our Energy Trading and Risk Management (ETRM) platform supports the full deal to cash lifecycle — from trading and logistics to risk monitoring and settlements. It’s built to unify workflows, so you don’t lose time or visibility to disconnected systems.
Our platform isn’t just about retrospective analysis — it actively helps people make better decisions. When you don’t have to second-guess your data or jump between tools, you free your team up to focus on the things that actually matter.
Want to see it in action?
