Risk Assessment of
Capital Projects in Power
Industry using Stochastic
Modelling Technique –
Case Study
Sadi Farooqui
Risk Consultant
25th April, 2013
Agenda
 Section one : Case Study of Capital based Projects for Power
Industry
 Section two : Enterprise Risk Management Solutions for Power
Industry
 Section three : Stochastic Modelling Process using @Risk
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 Section four :
Risk Assessment tool to identify key risks
 Section five :
Risk Management Strategy
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Introduction
Each Section will show ....
 Understanding of risk assessment tools to manage risk in Capital based
Projects for Power Industry
 Application of Risk measuring tools to analyse key risks
 Interpreting the results from Stochastic model to identify major risks
 Enterprise Risk Management Solutions
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Points to Note :
 Due to Client Confidentiality Agreements:
 No Data will be disclosed
 All model outputs are based on hypothetical data
 The objective is:
 To explore the risk modelling technique
 To understand the method of risk assessment based on current
case study
 To realise the power of @ Risk software in the market
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Section 1 :
Case Study of Capital Based Projects for Power
Industry
Power Industry
•
•
•
•
Electricity Generation
Greatly dependent on Power Stations
Energy efficiency
Meeting Power demand for current and future economy
Project Management
•
•
•
•
Define appropriate project life cycle
Managing budget vs CAPEX
Project Phases
Equipment Installation and Resource Management
Risk Management
•
•
•
•
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Risk Review
Identifying, Evaluation and Analysis
Monitoring key activities
Governance and Reporting
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Section 1 :
Power Industry : Key Objectives
 Efficiency and Success of the Projects
 Expand generation capacity equal to current and future electricity demand
 Minimal Delays and Budget over-runs
 Location of Generation Units
 Accessibility of Utilities and Resources
 Diversifying Energy mix to provide cleaner energy
 Availability of manpower
 Project Management Skills
 CAPEX vs Budget
 Effective Risk Management Framework
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Section 1 : Project Phase
1-EVALUATION
2-ENGINEERING
3-CONSTRUCTION & COMMISSION
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Section 1 : Main Components of the Project
Component
Area covered
Civil Works
Waterways, Powerhouse & Access
Tunnels
Hydro-Mechanical Plant
Turbine & Electro Mechanical
Plant
Auxiliary Mechanical Plant
Auxiliary systems
Electrical Plant
Generator Transformers &
Electrical Controls
Require critical Review of each
component !
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Section 1 : Project Planning
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Section 2 : Risk Assessment
 Identifying the risks – recording all the potential risks including
political, economic, technical, project management and regulatory risks
 Analysing the risks – estimating the likelihood or probability of that
risk occurring and the consequence to the project if the risk were to
occur
 Risk evaluation – classifying the risks into probability/consequence
matrix and identifying the risk that require treatments
 Risk treatment – for those risks which have been identified as
requiring treatment during the risk evaluation phase, a risk mitigation
plan is developed to treat the risk
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Section 2 : Risk Assessment Process
Stochastic
Modelling
Process
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Section 3 : Stochastic Modelling Process
1-Collecting data on Events
2-Collecting data on Severity
Application of Convolution Technique
Event Distribution vs Severity Distribution
Monte Carlo
Simulation
Obtain a Probability Distribution Curve
using @ Risk Professional
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Section 3 : Stochastic Modelling Process
Conduct an Impact Analysis
Analyse Impact of Key Risk Events on Project
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Section 3 : Defining Efficiency
PROJECT MANAGEMENT EFFICIENCY
Capital Expenditure – % Exceeding Budget
Project Timelines – Delay Period
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Section 3 : Risk Modelling Data Input
Project Phase
Number of delays
Cost Over-runs
(R’m)
Period of Delay
(Days)
A
2
1.2
25
B
3
3
33
C
5
7
17
D
6
4.8
58
E
1
6.32
44
Cost Over-runs per phase = Cost exceeding budget
Delay Period per phase = Actual Completion date – Schedule date
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Section 3 : Risk Modelling Data Input
Frequency Chart showing the number of delays per phase
14
12
Frequency
10
8
Number of Delays
6
4
2
0
1
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2
3
4
5
6
7
8
9
10 11
Number of Delays (Days)
12
13
14
15
16
17
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Section 3 : Risk Modelling Data Input
Frequency Chart showing the cost over-runs per phase
10
9
8
Frequency
7
6
5
Cost Over-runs
4
3
2
1
0
1
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2
3
4
5
6
7
8
9
10
11
Cost Over-runs (R'm)
12
13
14
15
16
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Section 3 : Risk Modelling Data Input
Frequency Chart showing the period of delay per phase
90
80
70
Frequency
60
50
40
Period of Delay
30
20
10
0
1
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2
3
4
5
6
7
8
9
10
Period of Delay (Days)
11
12
13
14
15
16
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Section 3 : Risk Modelling Methodology
Step 1: Obtain Best fitting curve for each distribution
Curve A
Curve B
Curve C
Number of Delays
Cost Over-runs
Period of Delay
@ RISK version 6
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Section 3 : Risk Modelling using @ Risk 6
Curve A
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Section 3 : Risk Modelling using @ Risk 6
Curve B
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Section 3 : Risk Modelling using @ Risk 6
Curve C
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Section 3 : Risk Modelling using @ Risk 6
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Section 3 : Risk Modelling using @ Risk 6
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Section 3 : Risk Modelling using @ Risk version 6
Calibration
Monte Carlo Simulation
Mean value should approximate – Calibrated !
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Section 3 : Risk Modelling using @ Risk 6
Convolution
X
Curve B
Graph from @ Risk ??
Monte Carlo Simulation Engine - @Risk 6
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Section 3 : Risk Modelling using @ Risk 6
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Section 3 : Model Output
Value at Risk Model
@ 99% Confidence Level = 110 R’m
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Section 3 : Model Output
Delay at Risk Model
@ 99% Confidence Level = 101 days
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Section 4 : Risk Assessment tool to identify Key risks
Project
Phase
Events causing delays
A
Landslides occurring near the construction site
B
Services to construction camp not ready in time
C
Construction activities causing damage to existing infrastructure
and plant
D
Communicable diseases
E
Ineffective working relationship between contractors and Project
Managers
Analyse the event to confirm the risk
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Section 4 : Risk Assessment tool to identify Key risks
Project
Phase
PwC
Cost Over-runs (R’m)
Period of Delay (Days)
A
6.7
33
B
4.5
56
C
2.6
49
D
1.35
85
E
9.6
35
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Section 4 : Risk Assessment tool to identify Key risks
Project
Phase
Cost Overruns
Cost per
Model
Period of
Delay
Period of Delay
per Model
A
6.7
0.06
33
0.33
B
4.5
0.04
56
0.55
C
2.6
0.02
49
0.49
D
1.35
0.01
85
0.84
E
9.6
0.09
35
0.35
Cost per Model = (Cost Over-runs )/ (Value at Risk Model - 99% CL)
Period of Delay per Model = (Period of Delay)/ (Delay at Risk Model - 99% CL)
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Section 4 : Risk Assessment tool to identify Key risks
Period of Delay per Model
Risk Matrix
PROJECT @ RISK
PROJECT IN CONTROL!
BUDGET CONSTRAINT
Cost per Model
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Section 4 : Risk Assessment tool to identify Key risks
Period of Delay per Model
Risk Matrix
3
1
2
4
5
Cost per Model
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Section 5 : Risk Management Strategy for Power Industry
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Point
Risk Event
Risk
Impact
1
Potential slip circles identified in
the geology
Exceeding the budget and
further delay in the project
Damage to infrastructure
-Loss in time
-Extensive cost & time for
repairs
2
Delays in rubble removals or
materials availability at site or
works pertaining to running the
plant.
Exceeding the budget and
further delay in the project
Increased volume of traffic
3
Delayed approval by the
Minister of public works
Further delay in the project
No accommodation for
increased staff levels
4
Lack of communication between
project team and station
management
Exceeding the budget
Inadequate water for
construction and
commissioning
5
Colliery not having capacity to
construct new conveyor facility
Exceeding the budget
Inadequate coal for
commissioning and operation
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Section 5 : Risk Management Strategy for Power Industry
Risk
Appetite
• Use the model to obtain the worst case loss
• Board to set limits
• Ensure a monitoring framework exists
Scenario
• Conduct scenario tests
• Compare the result to current scenario
• Regular back testing
• Place control measures at high risk points
• Emphasize regular monitoring and review
Control
Measures • Update control vs economic & political cycle
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Conclusion
This provides Project Managers in Power Industry :
 An effective Risk Framework to control risks on power plant projects
 To conduct impact analysis vs risk appetite
 A hands on approach to understand how modelling can be used to
identify and monitor key risks
 A better control on contractors assigned to complete the project
 A risk mitigation solution – Proactive approach vs Laid back
approach
 The power of @ Risk Software tool to reach the right decision !
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If you don’t !.......Poor Risk Management !
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Thank You !
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