In Eastern Europe, the unbundling of Romania’s power monopoly resulted in the generation of a ‘market’ for electricity for the first time, and with that the introduction of competition. This saw power companies exposed to market risks. As a result, they are now required by the country’s energy regulation agency to undertake risk analysis to ensure that they can identify and measure risk, as well as factor in a source of finance that will mitigate this.
The electric power grid company, Transelectrica, turned to risk analysis with @RISK to enable it to operate as a commercial organisation and meet EU standards. Using an @RISK model enables Transelectrica to analyse the risks specific to the energy market, as well as the impact that different tariffs, aimed at mitigating these risks, will have on the organisation overall. This helps to determine the level at which the risk component in its tariff should be set to ‘insure’ Transelectrica against financial repercussions should adverse events occur.
Historical data ‘measuring’ potentially adverse 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.
For example, in 2003 a drought across eastern Europe 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.
The use of risk assessment based on @RISK has resulted in a significant improvement in the regulatory framework of the Romanian power market. The coherent risk management activity at Transelectrica also enabled the grid company to attain a good financial rating, thereby ensuring it could meet the requirements of the EU Directive (114/2008) to protect critical infrastructure in Europe.
EMEA Managing Director of Risk & Decision Analysis