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Women in Electricity Networking Event Electricity Trading Risk Management Maturity and
Carbon Legislation Update
August 2013
Electricity Trading Risk Management Maturity
© 2013 Deloitte Touche Tohmatsu 3
Maturing of the Electricity Trading Risk Management Framework Market participants are moving to / have moved to an integrated approach
Maturing Risk Management Framework – more sophisticated risk measurement techniques
• MW limit
• Front Office
• Limited Middle Office
• Trading policy vs risk policy
• Spreadsheets limited quantification
Initial/Ad-hoc
• MW limits
• Front & Middle Office
• Limited risk governance and oversight
• Business units manage their own risks
• Fragmented in house systems and spreadsheets
• Some specialist skills
Fragmented • MW limits to @risk limits
• Well articulated policies,
procedures and
governance structures
• Portfolio wide view with
@risk measures such as
EaR, VaR
• Stress test/scenario
analysis
• Sophisticated skill sets
Integrated
Strategic
?
© 2013 Deloitte Touche Tohmatsu 4
Structural Change is Driving Strategic Review Where do returns reside within the supply chain?
Strategic Review
Extracting value along supply chain
Asset optimisation
Wholesale price decline
Accounting standard changes
More sophisticated approaches to retail
Shifting carbon and renewable policy
Gas supply / demand imbalances
Destruction of demand
© 2013 Deloitte Touche Tohmatsu 5
The Risk and the Return Balance Risk measurement is more sophisticated but is it linked to returns?
• More sophisticated risk
measurement techniques
can provide transparency
around risk exposures
• As risk measurement
techniques have matured,
the ability to make historical
returns has become more
difficult
• Are returns linked to risk
internally?
• Do you still want to maintain
current level of risk if returns
are decreasing?
© 2013 Deloitte Touche Tohmatsu 6
Capital Adequacy and Returns Existing financial institution practices - relevance for the electricity industry ?
Market
Risk
Credit
Risk
Operation Risk
Financial Liquidity
Capital Adequacy
Similar concepts employed that model Value at Risk and
Earnings at Risk are used by financial institutions and
overseas electricity companies to understand if the
entity is sufficiently capitalised
© 2013 Deloitte Touche Tohmatsu 7
Capital Adequacy, Capital Allocation and Returns Decompose return on capital by business unit to improve risk/return decisions
Market
Risk
Credit
Risk
Operation Risk
Financial Liquidity
Market
Risk
Credit
Risk
Operation Risk
Financial Liquidity
Market
Risk
Credit
Risk
Operation Risk
Financial Liquidity
Linking risk and return can help inform strategic
decisions
What is the return on the capital employed?
© 2013 Deloitte Touche Tohmatsu 8
Maturing of the Electricity Trading Risk Management Framework Market participants are moving to / have moved to an integrated approach
• MW limits to @risk limits
• Well articulated policies,
procedures and
governance structures
• Portfolio wide view with
@risk measures such as
EaR, CFaR, VaR, PFE
• Sophisticated skill sets
• MW limits
• Front & Middle Office
• Limited risk governance and oversight
• Business units manage their own risks
• Fragmented in house systems and spreadsheets
• Some specialist skills
• MW limit
• Front Office
• Limited Middle Office
• Trading policy vs risk policy
• Spreadsheets limited quantification
Initial/Ad-hoc
Fragmented
Integrated
Strategic
• Performance measures such as return versus risk taken
• Capital allocation is based on risk adjusted performance
• Risk management is a source of competitive advantage
• Sophisticated skills sets to strategic oversight
Maturing Risk Management Framework – more sophisticated risk measurement techniques
Carbon Update
© 2013 Deloitte Touche Tohmatsu 10
Two Different Parties with the Same Target 5% reduction by 2020
Australian Labor Party - mandatory
scheme
The Coalition - voluntary scheme
© 2013 Deloitte Touche Tohmatsu 11
ALP - The Carbon Pricing Mechanism What is currently in place and the possibility of new direction under Rudd
Fixed Price Period or Carbon Tax Floating Price Period or ETS
2012/2013 2013/2014 2014/2015 International Linking to EU – Australian
Potential Price Taker
$23 $24.15 $25.40 Currently trading around $6.50AUD
Rudd: Early removal of fixed
price period? Would require
Senate approval as set within
Clean Energy Act. Draft
legislation released for
comment by 15 August
© 2013 Deloitte Touche Tohmatsu 12
The Coalition - Repeal of the Carbon Pricing Mechanism Is it really feasible? It’s all about the Senate Composition
Co Gains Majority
House of Reps
and Senate
Text
Text Coalition Wins
Election
Gains Majority
House of Reps
and Labor
Doesn’t
Oppose
Gains Majority
House of Reps
and the Senate
via
Independents
Double
Dissolution –
Now Less
Likely?
© 2013 Deloitte Touche Tohmatsu 13
The Coalition - Repeal of the Carbon Pricing Mechanism Is it really feasible?
Senate Composition
• Revised Senate composition
takes effect July 2014.
• 40 contested seats 3 of
which are Greens
• Historically Senate swings
have not been significant.
• Since 1984 only one swing
greater than 2 seats which
was when Rudd came to
power in 2007.
• Even if Senate composition
does fall in the Coalitions
favour in July 2014 the
Repeal Bill would still need
to pass through parliament
and unwind the
administrative framework
created under the Clean
Energy Finance Package.
Double Dissolution Dilution of CPM
• ‘The Abbott Proof Fence’
• Other alternatives for the
Coalition include a dilution of
the Carbon Pricing
Mechanism, however, nearly
all the appropriate levers for
dilution such as emissions
thresholds, changing the
fixed price and reducing the
penalty for non-compliance
to zero are all contained
within the Clean Energy Act
and their amendment would
require clearance through
the parliamentary process.
• Double dissolution requires
legislation to fail twice with
a period of 3 months
between each submission.
Then a new election is
called and the new
parliament needs to be
sympathetic to the agenda.
• There have been six
double dissolutions in
Australia’s history, on two
occasions the government
achieved its legislative
aims. The closer election
then perceivably the less
‘mandate’ for repeal.
© 2013 Deloitte Touche Tohmatsu 14
The Coalition’s Direct Action Policy An incentive based scheme with no mandatory obligation
Direct Action Plan
Similar to Water Buyback Scheme in
MDB
Emissions Reduction Fund
Reverse Auction Pricing
High Level Policy
Similar to International Scheme
called CDM
Extension of the Carbon Farming
Initiative
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