Risk Quantification and Risk Management in Renewable Energy projects
Geoff Stevens
Uncertainty and Risk in Energy Futures 8th-9th September 2011
Risk Quantification and Risk Management
Introduction
The title for this talk is taken from the IEA report on Risk Quantification and Risk
Management in Renewable Energy Projects released in June this year
You can find the report at
http://www.iea-retd.org/files/RISK%20IEA-RETD%20(2011-6).pdf
Rather than try to present this 150 page report in the short time available I propose
to concentrate on the methods the report describes which deal with uncertainty and
risk in future energy projects.
I plan to focus on
1) Methods overall and especially those for risk identification
2) Shifts in risk perception for Renewable and Conventional energy projects
3) A case study for a pipeline illustrating the study output
I hope to convince you the method offers a sound and practical approach
Risk Quantification and Risk Management : Methods Overall
The Risk Analyst needs to embrace many views of risk in a balanced approach
The approach should
1. Embody independent judgement from the
many perspectives of the various
stakeholders associated with the project. As
well as the Engineers involved this may
include the Project Manager, the Business
Sponsor, the Financier as well external
Regulators and NGOs expressing minority
interests.
2 Avoid the analysis being subverted either to
justify narrow expert opinion or serve vested
interests.
3. Recognise that any opinion about project
uncertainties depends on
-who you are (your background)
-why you do the analysis (context)
-when you do it (project definition)
Risk Quantification and Risk Management: Methods Overall
A systematic method is essential to manage the many aspects involved
Starting from the project
definition we take a 6 step
approach which is iterative,
allowing improved definition
during the project life cycle.
Past, present and future
aspects are involved in a
continuous learning process
Risk Quantification and Risk Management: Methods Overall
The approach can be implemented by combining workshops and modeling
After collecting information to define the project and the needs of the analysis, a
workshop is held to identify uncertainties. Evaluation of the risks as probability
distributions informs a simulation model used for risk control in a second workshop
Risk Quantification and Risk Management: Methods Overall
A cyclical process can be developed incorporating key steps.....
Revise model
Parameters
Workshop
Rerun model with
revised inputs
Review the results
and management
options
Risk Quantification and Risk Management : Methods Overall
…...and the cycle can be repeated progressively through the project life
1
2
Range of Uncertainty
3
At the early
stages of the
project the
assessment of
risks is uncertain
As the project is
better defined the
risks are
assessed with
more confidence
Once the project
is in progress risk
controls reduce
the residual risk
still further
Risk Quantification and Risk Management : Risk Identification
Three methods are highlighted for identification depending on circumstances
1) Facilitated brainstorm
Open outcry from the group,
consolidation and cross check for
coverage using the PEST framework
2) Checklist
Using uncertainties from previous
projects a checklist can be
constructed using PEST to ensure
balanced coverage of potential issues
3) Structured questioning (HAZOP)
The main parameters (Flow, pressure,
temperature etc) are combined with
guidewords (high, low, no etc) to
generate a list of questions which are
applied to the project design
Example of Technical Risk Breakdown
developed in three levels using PEST
Risk Quantification and Risk Management : Risk Identification
Whichever method is chosen, the risk coverage is checked using PEST matrix
Best practice for risk identification
1) ensures all key topics are considered
2) incorporates lessons learned from
past projects
Political
Economic
Social
Environment
Technical
International
National
Regional
The process is improved by
A PEST analysis which helps to achieve
a full coverage of risks and not become
preoccupied with one risk area
Local Site
Individual
M ature Ris k s
16
The use of a facilitated workshop
drawing on a broad set of experience to
develop an agreed list of project risks.
The use of “risk libraries” derived from
relevant projects as a checklist to
prompt the identification process
14
12
10
8
6
4
T
2
S
0
E
I
N
R
Le ve l of Im pact
P
SS
SC
Ris k Type
Risk Quantification and Risk Management : Risk Perception
The types of uncertainties and issues raised shift as the project develops
In the early feasibility stage or when Front End Engineering is underway
uncertainties tend to be Political and Economic. Once in detailed engineering the
focus narrows to technical aspects of the particular site or customer
Risk Quantification and Risk Management : Risk Perception
The maturity of the engineering is an important influence on perception of risk
In the “pioneering“ phase dramatic cost overruns may occur. When a period of
conservatism sets in, projects with inflated budgets can be delivered below
estimate As the project engineering matures a more predictable regime can result
Risk Quantification and Risk Management : Risk Perception
Many factors combine to affect the risk perception of Renewable Energy projects
Comparing Renewable Energy
(LH column) and Conventional
Energy (RH Column) projects
- Many RE technologies are
immature and may not deliver
the design output/service factor
- Integration of RE power output
into conventional centralised
energy grid/distribution
- need for long term taxpayer
subsidy and political support
- Complex permitting if large
land take and social opposition
- immature supply chain with
pinch-points for key equipment
Risk Quantification and Risk Management : Pipeline example
PIPELINE Case Study – Risk Identification
Five workshops were conducted in four countries using expert teams from existing
gas or energy supply companies.
Each workshop followed the same steps, first defining and understanding the
options, second brainstorming risks within the PEST framework and thirdly
assessing the risks for use in a probabilistic DCF model.
Risk Quantification and Risk Management : Pipeline example
The results of the workshop exercise were recorded in a Risk Register
A proforma allows project definition to be recorded, uncertainties to be itemised,
their impact assessed and the range of opinion captured at the time of the
assessment to provide input to the risk model and risk mitigation exercise
Parameter affected
Risk ID
17
Delivery risk
Time between contract signing and gas shipment
Units
Representation
years
Base Case
4 years from date of signing to date of gas flow
1
0.8
0.6
0.4
Average
0.2
0
0.0
2.0
4.0
6.0
8.0
Parameter Value
Sign
Design and Construct
Negotiation Less
crude export
Start Gas
Operate
10.0
1
2
3
4
5
6
7
8
9
Min
0
3.5
Likely
1
3.9
Max
0
4.9
3.0
4.0
4.0
4.0
4.5
3.0
1.0
4.0
4.0
4.0
4.0
4.0
4.5
5.0
4.0
2.0
4.0
4.0
5.0
5.0
5.0
5.0
6.0
5.0
3.0
5.0
5.0
Abandon
Explanation
After contract signature within the sellers areas of responsibility will fall the construction and operation of the upstream facilities and the construction and
operation of the pipeline. These may fall to different types of organisation. Please estimate if any difficulties may be experienced which cause unavoidable
delay to the start of gas delivery after the date of signing of the supply agreement
Difficulties include both genuine 'force maejure issues causing unavoidable delay for technical reasons as well as delays resulting
from the technical competence of the contractor
Risk Quantification and Risk Management : Pipeline example
Uncertainties were grouped into categories and ranked by project impact
In the workshops each team initially concentrated on Technical aspects but by use
of the PEST framework a broader coverage of political and economic issues was
achieved
The 10 main categories of risk are shown below each of which was divided into
more detailed concerns as illustrated for the first risk category.
Risk Quantification and Risk Management: Pipeline example
Two cycles of Risk Evaluation were carried out to consolidate viewpoints
Because of the divergence of opinion across the five workshops, two review
sessions were included in the study plan to allow consolidation and constructive
challenge to the more extreme opinions
Risk Quantification and Risk Management : Pipeline example
The impact of each risk on the project DCF was simulated by Monte Carlo
A probabilistic model was assembled based on a Discounted Cash Flow
spreadsheet incorporating the assessment of risks made in the five workshops
using suitable probability distributions
Risk Quantification and Risk Management : Pipeline example
The benefit of various Risk Control measures could be assessed with the model
Several uses were made of the project model to explore approaches to improve
the economics of the project.
The first was to test the effect of increasing line capacity in various sections to
assess the probability of failing to reach the pipeline capacity (and loose revenue)
Risk Quantification and Risk Management: Pipeline example
Crucial to pipeline economics is the tariff required to remunerate the investment
The model was used to estimate tariff required to reach project hurdle rate. The
additional tariff needed to reach a selected probability of achieving the hurdle rate
was derived and this was used in market testing of the acceptability of the tariff.
Risk Quantification and Risk Management
Summary
In this presentation I have tried to cover a lot of material in a limited time but still give
Examples illustrating practical details
The main points I have tried to make are
1) Risk Quantification and Risk Management require a multi-faceted, systematic
approach. The temptation to pander to vested interests must be resisted.
2) There are three methods for risk identification suitable for different circumstances
but each benefiting from a PEST crosscheck
3) The results of the analysis allow probabilistic analysis of the likely economic
outcome of the project investment and provide a decision framework for improving
risk management from the viewpoint of project sponsor, financier, constructor as
well as the engineers and technologists trying to bring new technology to market