A no-holds-barred interview with the electric industry’s chief architect of wholesale electric market design.
A New World of Risks
A new set of skills and expertise will be necessary to deal with the risks created by new government mandates, new market developments, and new energy technologies.
Hanawalt predicts significant data management and analysis challenges, and thus risks, from the greater adoption of real-time metering as part of demand-response programs. Renewable portfolio programs that emphasize renewable energy technologies that are intermittent (such as wind) also are making risk analysis more complex as it is difficult to know when it’s being dispatched.
“So, if you look at what’s happening, the grid is getting really, really complex. The amount of dataflow that has to be assimilated by a utility to manage the reliability of the grid, while at the same time trying to maximize its portfolio value, has just gotten extremely complex.”
One Small Step
Even as the industry prepares for the new side of risk management, there still are some basic elementary business risks that many utilities are addressing. John England, Deloitte & Touche LLP’s managing partner, Global Energy Markets, says utilities continue to come to Deloitte more for risk-management performance measurement. His clients, both in regulated and unregulated utilities, have been asking to improve the communication of profit-and-loss and risk reporting.
“What we find is that a lot of utilities are struggling with the ability to get good daily and monthly reporting of profit and loss, and risk metrics like earnings at risk. The obstacle is that they tend to have multiple systems and because of that they need something that brings the information together and helps them report in a meaningful way.”
The problem, England explains, is that many utilities have data about their purchases and sales of energy on multiple systems. “They may have one system that handles coal, one system that handles gas, one system that handles power, or, in other words, silo issues.”
But he believes utilities have come a long way from the early days of risk management. He says utilities have become better at managing market risk and credit risk as a result of the lessons learned during the Enron collapse.
Furthermore, the industry is starting to evolve and is beginning to look at other risks such as operational risk and regulatory risk, he says.
“Utilities have known the importance of regulatory risk, but now they are trying to quantify the earnings impact of that. What we are encouraging companies to do is implement a truly enterprise-wide risk-management capability, what we call risk intelligence, where they look at all these risks across business units and risk types,” England says.
Of course, England admits that these risks are the most difficult to quantify, but necessary. Such as asking, “What is the impact on my earnings if I have an outage during peak period?”
These are the things that are on the cutting edge, he says. “We think if these companies can quantify these kinds of risks, they can make better investment decisions, better capital allocation decisions, and better performance management decisions,” he says.
Furthermore, England believes the best examples of the benefits of risk management are around capital allocation decisions.
“So, [if] I have a limited pool of capital to spend, I’m going to spend it in areas where I get the most return.