| Date post: | 08-Jun-2015 |
| Category: |
Documents |
| Upload: | jacknickelson |
| View: | 172 times |
| Download: | 0 times |
PG L. The ValueProvider for
Power GenerationManagement
Power Generation l Power IT Solutions
Successfully Managing Risk from the Power Plant to the BoardroomThe Art of the Corporate Decision
Power Generation l Power IT Solutions 2John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Three Thoughts…
To Be Successful, You Need To Manage Your Risks Across The Enterprise
Risk Management Is Easy Uncertainty Can Bankrupt You
When we talk about risk management, we really mean managing our risk/return
dynamics!
Power Generation l Power IT Solutions 3John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Charting a Path to Corporate Success
To Be Successful You Must:
At The Enterprise Level!
UnderstandIdentify Measure Manage
Your Risk & Return
Power Generation l Power IT Solutions 4John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Risk, What Risk?
To Be Successful, You Need To Manage Your Risks Across The Enterprise
“We got out of trading, we don’t have risk” If you have assets, consume raw materials, employ people, etc. You
have risk! Generating units are extremely risky assets
–Market and volumetric risks–Often operate outside the formal risk structure
Power Generation l Power IT Solutions 5John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Spectrum of Enterprise Risks
Market Risk
Risks associated with changes in market factors such as commodity prices, exchange rates, basis, liquidity, and interest rates
Credit Risk
The risk that a counterparty may default or become less able to fulfill their contractual obligations (financial and physical)
Operational Risk
The breakdown in management controls, information technology, processes, and people
Business Risk
Risks specific to the industry and markets in which a firm operates. For energy firms these may includePlant outages, weather, customer migration, volumetric risk, regulation
UnderstandIdentify
Power Generation l Power IT Solutions 6John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Most Energy Firms Manage Their Risk In “Silos”
Problems With The Silo Approach
A firm’s risks are intertwined Risks cannot be neatly divided across business processes
Introduces inefficiencies and inaccuracies Diversification benefits may be lost or overstated
Redundant systems and people
Inconsistent data sources and assumptios
Actually increases the firm’s operational risk!
Why Manage Risk at the Enterprise Level?
Physical Nat Gas Power PlanningFinancial
Power Generation l Power IT Solutions 7John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Enterprise Risk Management
Address Risk Across Each Of The Firm’s Business Processes:
IT & Infrastructure
Physical Assets
Engineering
Operations&
Production
Asset Management
Trading & Risk Management
Fuel Procurement Strategic Planning
Corporate Strategy
Credit Management
Power Generation l Power IT Solutions 8John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Enterprise Risk Management
Enterprise Risk Management Is NOT:
Performing all risk management and risk controls from a single corporate office
Using one super computer
Enterprise Risk Management IS:
Incorporating risk management into all of a firm’s business processes and decisions
Training employees to make risk-adjusted decisions
Ensuring consistent risk policies and procedures
Providing risk controls
Communicating this with the firm’s management and stakeholders!
Power Generation l Power IT Solutions 9John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Roadblocks to Managing Enterprise Risk
If Enterprise Risk Management Is So Important, Why Isn’t Everyone Doing it?
Roadblocks To Managing Enterprise Risk
The “science” of risk management
IT and infrastructure
Power Generation l Power IT Solutions 10John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Roadblock 1: The “Science” of Risk Management
Steps To Implementing Enterprise Risk Management
Define and document risk management policies and procedures
Implement systems to measure risk
Engage in activities to manage risk Risk Versus Uncertainty
Risks are uncertainties to which we can assign a probability If you draw a single card from a standard deck of cards you can calculate the
exact probability of it being the ace of spades
If you bet on the ace of spades, you can asses the risk of losing the bet and take action to mitigate your risk
Uncertainty – take a thousand decks of cards, mix them, and randomly create a deck of fifty-two
What is the probability of drawing the ace of spades?
You don’t know!
People Often Mistake Uncertainty For Risk! Can be a very painful mistake…
Power Generation l Power IT Solutions 11John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Roadblock 1: The “Science” of Risk Management
“Soft” Risks – Risks That Are Difficult to Quantify
Most operational risks fall under this category What is the probability that one of your generating plant operators will
encounter a situation they are not prepared for and cause the plant to trip off-line during the peak period?
What is the probability that one of your credit analysts will type in a number incorrectly and expose the firm to significant, but unseen, credit risks?
What is the probability that your most valuable employee will leave the firm?
What type of probability distribution do you use to measure these risks? How do we develop the statistical parameters necessary to model
these distributions?
Lack of liquidity and transparency in power markets turn even simple market risks into “soft” risks for power generators!
Power Generation l Power IT Solutions 12John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Roadblock 2: IT and Infrastructure
A Simple Example: An Energy Firm That Owns A Single Electric Generating Plant And Sells The Output Into The Market
What are all of the parameters that affect the value of this plant and the risk in monetizing this value?
Plant processes that change second by second and affect the component health of the plant and the plant’s availability
We have financed the plant over a twenty year horizon and future economic growth scenarios and potential environmental regulations significantly affect the risk/return profile of the plant and the firm
Hourly traders need to know the current status of the plant (is it up or down, how fast can it ramp, how many MW are available, etc.)
The structuring desk needs to know future expected plant availability and market conditions to sell the plant forward
Planners and longer-term analysts need to produce risk-adjusted revenue and cash flow, fuel use, and plant operation projections that use longer-term plant operating characteristics combined with forecast market and regulatory conditions
Power Generation l Power IT Solutions 13John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Roadblock 2: IT and Infrastructure
A Simple Example: An Energy Firm That Owns A Single Electric Generating Plant And Sells The Output Into The Market
Tremendous amount of raw data and information that must be managed across this process
Multiple business entities within the firm are involved – each with their own needs and operating targets.
Power Generation l Power IT Solutions 14John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Roadblock 2: IT and Infrastructure
Efficiently Managing This Process Requires State-of-the-art IT And Substantial Infrastructure Investment
Generation Asset Information Flow
Scheduling &Dispatch
Fuel &Emissions
Volumes& Rates
Plant StatusInstrument
&Controls
Trading
Asset Optimization
MarketInterface
FinancialPlanningStructuring
ResourcePlanning
Power Generation l Power IT Solutions 15John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Roadblock 2: IT and Infrastructure
The Most Commonplace Physical Energy Products – such as generating assets, natural gas storage, cross-commodity transactions, and weather-sensitive demand – Are Extremely Complex Compared To Financial Transactions
Do not lend themselves to closed-form valuation
Monte Carlo methods are the most widely-used technique in valuing these products
Monte Carlo simulations require significantly more computing power than closed-form solutions
Today’s computer hardware provides the tools to successfully address complex business analysis using Monte Carlo methods
Still, performing on-the-fly valuations of these physical energy products poses a continuing challenge
Power Generation l Power IT Solutions 16John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Removing the Roadblocks
Implement Enterprise Risk Management Policies And Procedures
Forms the framework around which we identify, understand, measure, and manage risk across the enterprise
Should also include initiatives to educate employees on considering risks in their day-to-day decision making
Further information: Committee of Chief Risk Officers Website (www.ccro.org)
“Managing Energy Risk: A Nontechnical Guide to Markets and Trading” by John Wengler
Power Generation l Power IT Solutions 17John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Removing the Roadblocks
Risk Versus Uncertainty
Incorporate rigorous stress testing and scenario analysis across the decision-making process – from intra-day trading to long-term strategic planning
Use a blend of analytical approaches to embody fundamental and market-centric views and gain perspective on the full range of possible decision outcomes - fundamental analysis, technical analysis, and experience each provide different yet complementary insights into how future events will effect current business decisions
Don’t rely on a single risk metric – apply a combination of metrics Risk-adjusted return on capital (RAROC) Economic capital “At risk” metrics: VaR, cash flow at risk, earnings at risk, volume at risk, The “Greeks”
Power Generation l Power IT Solutions 18John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Removing the Roadblocks
IT And Infrastructure
Open system architecture Communicate across applications and platforms
– Intra- or inter-business process– From real-time to mid-term to long-term for data capture and
analysis– New and legacy systems
Integrate proprietary analytics and valuation
– Capitalize on the firms intellectual capital– Manage “soft” risks
True front-to-back solutions Reduce operational risk by enabling consistent assumptions &
valuation methods across the enterprise Eliminate risk silos with cross-commodity capabilities (i.e., managing
risk across all commodities)
Power Generation l Power IT Solutions 19John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Removing the Roadblocks
IT And Infrastructure (continued)
Distributed processing, including distributed Monte Carlo Allow for “on-the-fly” valuation of complex energy deals Enable intra-day and even real-time portfolio and credit risk metrics
Browser-based, n-tier architecture Scalable as the number of users, size of the portfolio, and complexity
of deals increases Easily deployed across the enterprise to reduce versioning risk and to
lower upgrade and maintenance costs
Power Generation l Power IT Solutions 20John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Parting Thoughts
Silo Approach Provides Incomplete & Potentially Inaccurate View Of The Firm’s Risks – may actually increase operational risk exposure!
Firms that Implement Enterprise Risk Management Will Achieve Competitive Advantage – driving real value to the firm’s bottom line!
Risk Management Is Easy…
Metallgesellschaft AG ($2.4bn, 1993) Orange County ($1.6bn, 1994) Daiwa Bank ($1.1bn, 1995) Barings Bank ($1.3bn, 1995) Sumitomo Corporation ($1.8bn, 1996) Long Term Capital Management ($3.6bn, 1998) Ashanti Goldfields ($100m, 1999) Enron (2001) Allied Irish Bank ($700m, 2002)
UncertaintyUncertainty can can be very painful…be very painful…
Power Generation l Power IT Solutions 21John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Parting Thoughts
“Rare events exist because they are unexpected.” - Nassim Taleb (Fooled by Randomness)
“If you give a pilot an altimeter that is sometimes defective and he will crash the plane. Give him nothing and he will look out the window.” - Nassim Taleb (interview in Derivatives Strategy)
“Any idiot can face a crisis – it’s day to day living that wears you out” – Anton Chekhov
Power Generation l Power IT Solutions 22John P.W. Brown VI – October 2003
PG L. The Value
Provider for
Power Generation
Management
Questions & (hopefully) Answers
John P.W. Brown VI
Vice President, Energy Market & Asset Analysis
![[download presentation]](https://static.documents.pub/doc/80x56/58ed52e71a28aba07f8b46d9/download-presentation-58ed563c834ba.jpg)
