- Industry: Utilities
- Product(s): @RISK
- Application: Measuring and Mitigating Open Market Risk
To meet EU requirements to protect critical infrastructure in Europe, Transelectra used @RISK to analyze energy market risks and set appropriate tariffs to protect against financial repercussions should adverse events occur.
@RISK’s parameter control and Monte Carlo simulation capability makes it very straightforward to manage and analyse data, as well as predict future trends. At the same time, the results are easy to understand which ensures their credibility. This is reinforced by @RISK’s flexibility – far from being a ‘black box’ that produces un-explained results, it allows users to build and alter the model for their specific individual needs.Dr Ionut Purica, Executive Director, Advisory Center for Energy and Environment
Romania-based electric power grid company, Transelectrica, is using @RISK to enable it to operate as a commercial organisation as the country – and the region – opens its power industry to competition. Risk analysis with @RISK enables the company to analyse the risks specific to the energy market, as well as the impact that different tariffs, aimed at mitigating these risks, would have on the organisation overall. This helps to determine the level at which the risk component in the tariff should be set to ‘insure’ Transelectrica against financial repercussions should adverse events occur. As a result of its risk management, the grid company has met the EU the requirements to protect critical infrastructure in Europe.
Transelectrica was formed in 2000 following the de-merging of the former Romanian Electricity Authority (CONEL) into separate entities (electricity generation, transmission-dispatch and distribution), as part of Romania’s unbundling of its power monopoly into a power market.
Today Transelectrica is listed on the Bucharest Stock Exchange. It operates the electricity transmission system and enables electricity exchanges between central and eastern European countries. This sees it manage supply and demand by ‘balancing’ electricity generation and consumption.
De-regulated Market Must Measure Risk
The un-bundling of CONEL resulted in the generation of a ‘market’ for electricity for the first time, and with that the introduction of competition. This saw the power companies exposed to market risks, with the consequence being that they had to learn to identify, measure and mitigate them.
In 2004, Romania’s National Regulatory Agency for Energy (ANRE) introduced ‘Chapter 3.7’ to the power market’s commercial ‘grid code’, which formalised the requirement for energy companies to undertake risk analysis. The overall aim was to ensure that they could identify the cost of mitigating risk and factor in a source of finance that would cover this. The requirements included assessing both market risks, internal company risks, and determining the costs of their mitigation. A provision was also made for a component of risk and insurance in the electrical energy tariff that would be awarded based on each company’s request supported by a thorough analysis report.
@RISK Selected for Risk Assessment
Chapter 3.7 reinforced the demand for Transelectrica to first identify and measure the market risks to which it was exposed. Dr Ionut Purica, executive director at the Advisory Center for Energy and Environment in Romania, undertook a component of this study. This work formed the basis of ANRE’s introduction of the risk related provisions described above.
Dr Purica had used @RISK previously to analyse the risk exposure of Transelectrica’s tariff to the market conditions, based on real data from previous years. As a result he believed it was one of the best tools for the provision of risk assessment for Romania’s power industry.
@RISK Indicates Tariff Levels That Insure Against Adverse Events
A key element was to enable Transelectrica to operate as a commercial organisation with growth potential. To help it meet this objective, Purica developed a model using @RISK that allowed the company to analyse the risks specific to the energy market, as well as the impact that different tariffs, aimed at mitigating these risks, would have on the organisation overall. This helped to determine the level at which the risk component in the tariff should be set to ‘insure’ Transelectrica against financial repercussions should adverse events occur.
For example, in 2003 a drought across eastern Europe (which was especially severe around the Danube) led to a water shortage that resulted in the hydro-electric companies in the region generating less power. Factoring this into Transelectrica’s @RISK power transmission price model showed an increased risk exposure that must therefore be reflected in the tariff.
Historical data ‘measuring’ these events in terms of the likelihood that they will occur and the consequences if they do are used as the inputs to the @RISK model. Transelectrica can then determine the level at which it needs to set its tariffs. This process is repeated every two to three years due to the inherent volatility of power market.
@RISK Produces Easily Understood Results
“@RISK’s parameter control and Monte Carlo simulation capability makes it very straightforward to manage and analyse data, as well as predict future trends. At the same time, the results are easy to understand which ensures their credibility,” explains Dr Purica. “This is reinforced by @RISK’s flexibility – far from being a ‘black box’ that produces un-explained results, it allows users to build and alter the model for their specific individual needs.”
In addition, Dr Purica recognises that to determine Transelectrica’s risk exposure in the future, a key element was taking into account the evolution of the average distribution, as well as considering the standard deviation of the distribution. This was incorporated in the @RISK model.
@RISK Helps Transelectrica to Meet EU Directive Requirement
The use of risk assessment based on @RISK resulted in a significant improvement in the regulatory framework of the Romanian power market. The coherent risk management activity at Transelectrica also resulted in the grid company attaining a good financial rating, thereby ensuring it could meet the requirements of the EU Directive (114/2008) to protect critical infrastructure in Europe.