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

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
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
Hydro-Mechanical Plant
Auxiliary Mechanical Plant
Electrical Plant
Waterways, Powerhouse & Access
Tunnels
Turbine & Electro Mechanical
Plant
Auxiliary systems
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 Monte Carlo

Simulation
Event Distribution vs Severity Distribution

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 Period of Delay

(Rm) (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

10
Frequency

6 Number of Delays

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Number of Delays (Days)

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 Section 3 : Risk Modelling Data Input
Frequency Chart showing the cost over-runs per phase

10

6
Frequency

5
Cost Over-runs
4

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Cost Over-runs (R'm)

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 Section 3 : Risk Modelling Data Input
Frequency Chart showing the period of delay per phase

90

80

70

60
Frequency

50

40 Period of Delay

30

20

10

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period of Delay (Days)

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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 Rm

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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 Events causing delays

Phase
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 Cost Over-runs (Rm) Period of Delay (Days)

Phase

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 Cost Over- Cost per Period of Period of Delay

Phase runs Model 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

Risk Matrix
Period of Delay per Model

PROJECT @ RISK

PROJECT IN CONTROL! BUDGET CONSTRAINT

Cost per Model

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 Section 4 : Risk Assessment tool to identify Key risks

Risk Matrix

1
Period of Delay per Model

3 2

Cost per Model

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 Section 5 : Risk Management Strategy for Power Industry

Point Risk Event Risk Impact

1 Potential slip circles identified in Exceeding the budget and Damage to infrastructure
the geology further delay in the project -Loss in time
-Extensive cost & time for
repairs

2 Delays in rubble removals or Exceeding the budget and Increased volume of traffic
materials availability at site or further delay in the project
works pertaining to running the
plant.

3 Delayed approval by the Further delay in the project No accommodation for

Minister of public works increased staff levels

4 Lack of communication between Exceeding the budget Inadequate water for

project team and station construction and
management commissioning

5 Colliery not having capacity to Exceeding the budget Inadequate coal for
construct new conveyor facility commissioning and operation

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 Section 5 : Risk Management Strategy for Power Industry

Use the model to obtain the worst case loss

Board to set limits
Risk
Appetite Ensure a monitoring framework exists

Conduct scenario tests

Compare the result to current scenario
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 dont !.......Poor Risk Management !

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 Thank You !

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