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Energy Risk Management

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 Proceedings of the International Conference on RISK MANAGEMENT, ASSESSMENT and MITIGATION

Energy Risk Management

CONSTANTIN OPRAN
Production Engineering Department
POLITEHNICA University Bucharest
313, Splaiul IndependenŃei, Bucharest 060042
ROMANIA
constantin.opran@ltpc.pub.ro

Abstract: - The Energy represent a necessity in a modern society. To meet the needs of food, environment, housing,
lighting, transport and freight and goods requires, information technology, is necessary to supply of good energy.
Energy sector affects the evolution of whole societies. Currently conceived cannot be a developed economy, with an
adequate social sector in Europe 21 century, without an efficient energy sector.The industry of Energy was the fourth
large area exposed to risks in 2008. Humanity is increasingly dependent on energy sources, making the concern for
ensuring the long-term sources is now an important component of political strategy at national and international level.
The energy system is exposed to natural hazards, operational and commercial risk who leading to the generation of
social risk in case when the risks resulting from uncontrolled energy can lead to disaster energy. Manifestation of social
risk has a significant negative impulse to the entire economic and social system. The paper aims to determine the
energy risks and control this, using risk management’s technique in order to have a minimum social risk and social
crisis.The procedures for risk management in energy are presented in accordance with ISO 31000 which will be
launched on the market in June 2009.

Key-Words: - energy risk, risk management, social risk, social crisis.

1 Introduction Energy risk management is defined as energy

The risk? Nothing more simple and also somewhat more management, considering uncertain events existing in a
complex to identify and especially to control. From normal order of global socio-economic life [2].
dawn of history, risks have been one of the biggest and Energy Crisis: Energy is vital for any functioning
most exciting challenges for the human race. In the economy. Moreover, the period during which the
opinion of the Economic and Social Committee on the received energy, safe and inexpensive ended. Besides the
definition of an energy policy for Europe it reiterates dependence of increasing imports and prices and higher
that: “Energy is a necessity in modern society. To meet energy, humankind is facing the challenges posed by
the needs of food, environment, housing, lighting, climate change, caused largely by the increasingly higher
transport and freight and goods requires, information energy. If conduct normal activities, the dependence of
technology, is necessary to supply good energy. But how EU energy imports will fall from 50% of, its total energy
they meet these needs, can and should be changed” [6]. is currently at 65% in 2030. It is expected an increase in
dependence on gas imports from 57% to 84% by 2030
and from 82% to 93% for oil imports. This presents a
risk of political and economic. World energy resources
2 Energy Risk Management are under extreme pressure [5].
2.1 Characterization Social crisis: Energy affects the entire society
Risk is defined as an uncertain element, but possibly, fundamental developments. Currently designed cannot
appear in the technical events, human, social, political, be a developed economy, with an adequate social sector
reflecting the distribution of the possible variations, in Europe of the XXI century without an effective
probability of occurrence of the subjective and objective, energy sector. National energy sector has to face major
with possible damaging effects and irreversible [1]. challenges that are manifested at intern and global level:
Risk management is defined as the management of security of energy supply, increase economic
uncertain events, in order to success [3]. competitiveness and reduce environmental impact. These
Risk management has the feature all of the methods and challenges are particularly important under the
means that risk is managed to achieve the objectives conditions in which Romania has to catch up economic
described in the event, social, human and political performance compared to developed countries of the EU.
analysis, with uncertainly as the major risk factors.

ISSN: 1790-2769 346 ISBN: 978-960-474-182-3

 Proceedings of the International Conference on RISK MANAGEMENT, ASSESSMENT and MITIGATION

Resolving these problems is to use optimal energy and Communication and consultation: consultation and
derived respectively by reducing energy consumption communication with affected parties / stakeholders,
from the design of and ending with their re-use. internal and external every step of the process for the
risk management;
Monitoring and review: aims to implement strategies
2.2 Energy Risks and monitor the response that these changes bring them
Principles for energy risk management are: in the event analysis.
a) creates value In order to have a continuous improvement of the energy
b) integral part of organizational commitment risk management is establish the fooling diagram
c) part of decision making according ISO:
d) explicity addresses uncertainty
e) systematic, structured ant timely Mandate and commitment
f) based on the best available information
Plan
g) tailored
h) takes human and cultural factors into account Design of framework for managing energy risks
i) transparent and inclusive • Understanding the organization and its context
j) dynamic, iterative and responsive to change • Risk management policy
k) facilitates continual improvement and • Integration in to organizational processes
enhancement of the organization • Accountability
• Resources
• Establish internal communication and reporting
Establish the context of energy mechanism
risks • Establishing external communication and
Communicate and consult

reporting mechanisms
Monitor and review

Identify energy risks

Do
Analyze energy risks Implementing energy risk
Act management
Continual improvement • Implementing the framework
Evaluate energy risks of the framework for the managing energy risk
• Implementing the energy risk
Treat energy risks management process
Check
Fig. Energy risk management process [5] Monitoring and review of the framework
The Stages of energy risk management following generic
stages of the process of risk management are: Fig. 2 Continuous improvement of the energy risk
Establish context: strategic context determination, management [4]
organizational management and risk, and to structure
analysis and the criteria on which risks will be assessed,
identification of affected parties / stakeholders and 2.3 Effects of Energy Risks
policy of communication and consultation; Economic and financial risks that the effects of energy
Hazard identification: identification as a basis of risk:
subsequent analysis, what can happen, why and how, Financial resources and raw energy are limited. To carry
including the dangers and consequences associated; out large projects in energy are necessary funds to
Risks analysis: risk analysis in terms of probability and finance large, whose recovery presents a significant risk,
severity, possibilities of control and the control measures whereas investment takes place on long time. In this
the seriousness of the consequences, likelihood of regard the financing in the energy sector is a complex
producing and the gravity can be combined in order to issue.
estimate the level of risk; Social risks effects on energy risk:
Risk assessment: search involves the systematic risk Social risks are defined as those circumstances which
factors in the event to be achieved; may trigger the reduction of income or increasing of
Treat risks: develop and implement a management plan costs. Legally, both internally and at international level
should include considerations on the allocation of social risks are defined, usually as: old age, sickness,
financial resources and other and deadlines for action; disability, motherhood, the legal protection of labor

ISSN: 1790-2769 347 ISBN: 978-960-474-182-3

 Proceedings of the International Conference on RISK MANAGEMENT, ASSESSMENT and MITIGATION

rights, unemployment, etc. These risks are covered by rB - energy business risk given the nature of the activity
Social Convention 102/1952 of International Labor in which the investment;
Organization. rF - financial risk of energy given the way in which the
Political risks versus energy risks: business is financed.
Political risks consist of social and political events, Modeling risk for a company producing electricity is :
beyond the purchaser's solvency and it prevents to honor σ ⋅ Rfinancial = σ ⋅ Reconomic + σ ⋅ (Re - Rd ) ⋅ gic (5)
payment obligations towards the supplier (war, strikes). σ ⋅ Reconomic= σ ⋅ Rinterest + σ . (Rm - Rd ) .Saf (6)
Political risks can be generated and the various measures Saf = (gic . Sci + Scp) / (1 + gic ) (7)
taken by the government of the state where the partner, In wich : σ . Rfinancial = financial risck ;
materialized in effect as: restriction of imports, limiting Reconomic = economic risk; Rd = rate;
the transfer rate, seizure or confiscation of goods gic = degree of indebtedness of the company's electricity;
belonging to the trader, etc. [7] Saf = sensitivity of portfolio assets related design -
realization that exploitation;
Rm = rate of return on the market of products
3 Modeling and Simulation Financial - investigated;
Economic Crisis Due To Risk Energy Sci , Scp = sensitivities rates of return over equity (cp) and
borrowed (ci).
3.1 Modeling Economics Risks
Discussing solution design - implementation - operation
In practice, achieving an energy project is an economic
targets energy se make light of the updated net income
model associated bazic with two parameters - income
(VNA) and the internal rate of making financial (RIRF).
and risk.
Conditions of acceptance of the solution proposed by the
Pairs can be estimated income - risk for a concrete
energy project can thus write:
depending on the configuration of a set of internal and
VNA > 0 and RIRF > opportunity cost of capital.
external factors.
These indicators complement each other whereas VNA
For a given distribution of income (income pairs - Risk)
reflects the total achievable and RIRF reflect reported
calculating typical characteristics to be used for decision
profits. These guidelines may be applied when we do not
modeling:
have restrictions on financing energy projects. In case of
average income:
restrictions on capital and the projected duration of
E = ∑ p iVi (1)
development have different, then correlating indicators
i =1
square mean deviation of income σ: and VAN and RIRF is so graphic, and analytical.
(2) Analytical, calculated coefficients of variation for VAN
σ = ∑ pi (Vi − E )
2
and RIRF şi determine the general influence that
i =1

where: includes both (VNA and RIRF ) as :

pi - probability of achieving income Vi; F =
g
VNA
{[C (VNA)]σ + [C ( RIRF )]1−ν }
I
ν ν
(8)
n- the state (income) possible; I surse _ proprii
σ - square mean deviation of income; γ= (9)
I capitol _ total _ proiect
Vi – income;
σ (10)
Characteristics are used to distinguish the governor to C ν ( VNA ) = VNA
VNA
incline toward risk the governor with risk aversion. The σ (11)
propensity to prefer risk variants that have large amounts C ν ( RIRF ) = RIRF
RIRF
of income, but with low probability of achieving, so  n

1/ 2
n 
1/ 2

those with a dispersion (σ) than. σ VNA = ∑ (VNAi − VNA) 2 ⋅ p(VNA) / ∑ p(VNAi ) (12)
 i =1   i =1 
Total risk is divided as follows: 1/ 2 1/ 2
 n
 n  (13)
• the possibility of reducing its components: σ RIRF = ∑ ( RIRFi − RIRF ) 2 ⋅ p( RIRF ) / ∑ p( RIRFi )
 i =1   i =1 
rT = rsist + rspec; (3)
rT- total risk; in wich: Cν, σ = coefficients of variation (ν) and standard
rsist - systematic risk which can not be removed and is deviation (σ)
generated by a number of macroeconomic factors Return lead to financial risk if the actual deviations from
(interest level). those calculated written under the following forms:
rspec - specific risk be reduced through appropriate R f = Re + ( Re − Rd ) ⋅ gνc (14)
techniques: σ ( R f ) = σ [Re + ( Re − Rd ) ⋅ gνc ] (15)
• the origin of risk: In wich: σ (Rf) estimated risk level profitability by using
rT = rB + rF (4) financial irregularity standard (σ). Risk can be divided

ISSN: 1790-2769 348 ISBN: 978-960-474-182-3

 Proceedings of the International Conference on RISK MANAGEMENT, ASSESSMENT and MITIGATION

into risk matchlessly (σ ⋅ Rfns) symmetric and risk (σ ⋅ All these dimensions of state may be associated in the
Rfs) as shown in the following relationship: form S1, S2, S3. These conditions characterize each stage
σ ( R f ) = (σ ⋅ R fns + σ ⋅ R fs ) = R1controlable + R2non−controlable ) (16) of the evolution of the system from the initial (S1, S2,
S3)0 feasibility study and moving to states (S1, S2, S3)k (k
Control is achieved by the decision that can oversee the
= 1….n). Retain favorable states that do not contain the
performance of projects, efficiency sources of funding,
digit 0 in the structure. Each state is affected by both
end time and delivery of projects including campaign
intrinsic probability and the probability of transition
strategy. The risk that escapes the control decision is
between states by passing. If the transition probability
made conditional on external factors of such as customs
matrix is stationary, then to solve the problem is
and tax policies, technological process, economic and
aplelează stationary Markov Models, otherwise turn to
social issues and political (competition, economic
the Markov models of nonstationary discrete variable
recession, the cost of capital, etc).
and continuous, by case.
Starting from the economic profitability (Re) Financial
Probability field Cp (k) = p1(k), p2 (k), p3(k) knowledge
risk is defined σ(Rf) the relationship of the form:
structure is determined by the transition matrix.
σ (R f ) = σ (Re ) ⋅ (1 + gic ) (17)
Re = Rd + ( Rm − Rd ) ⋅ S ap (18)
Sap = sensitivity of assets in projects 4 Conclusions
Rd = loan interest rate without risk (guaranteed by the Energy, whatever its form, is an indispensable necessity
State) for society, both in terms of human comfort, and as a
Rm = rate of return on the market; Sap (Rm - Rd) = risk factor of production. The degree of economic and social
premium development is greater with both increasing and demand
With these notaŃii can write such a financial risk: for energy.
σ ( R f ) = σ [Rd + S ap − ( Rm − Rd )]⋅ (1 + g ic ) (19) Issue cover energy demand is included in all
S ap = (Scp + Sci ⋅ gic ) ⋅ g ic (20) development strategies of governments, but these
strategies must take account of energy resourcese which
In wich: Scp , Sci = sensitivity rates of return from capital show a great volatility in the price reference and a
(cp) and borrowed capital (ci). multitude of risks associated with production and
Dynamic Control of energy projects for their structuring trading. In recent years, the issue of exhaustion of energy
in terms of profitability can be done quickly by applying resources and energy security agendas dominate the
the method of analysis markoviene. The functions of the world stage actors. Competition for energy resources in
operating performance markoviană analysis are: updated the contemporary world remains an important source of
net income; the internal rate of financial return; crises and conflicts, with a particular role of polarization
generalized function (fg), that the coefficient of variation and / or catalizare forces, as long as demand grows to
(Cv). much faster than supply, and major oil reserves are
These functions can define the system analyzed. In this located in areas characterized profound political-
perspective it quantifies sizes VNA, RIRF, Cv both as economic in balances and instability.
initial values (0), and the extreme maximum values U.S., EU, China and Russia are both in relationships of
(max) and minimum allowable in terms of return on competition, and cooperation in the process of access,
fixed capital in the project. The internal rate of return on control and exploitation of these resources. Polarization
the initial (RIRF)0 is the marginal cost of capital, and attention on these areas often leads to disputes between
(RIRF) is minimum opportunity cost of capital reflected energy consumers competitors. Also, ecological
by the maximum incremental value is expected in the interdependence, and not energy independence appears
analyzed (life of the project). The states associated with to be the most viable way of solving the consumption
the development of Markov analysis is defined as: ever higher.
VNA > VNAmin ⇒ 2

VNA ∈ [VNA0 , VNAmin ] ⇒ 1
VNA > VNA ⇒ 0
 0
(21) References:
 RIRF > RIRFmin ⇒ 2 [1] Opran, C., Stan, S., Managementul proiectului,

 RIRF ∈ [RIRF0 , RIRFmin ] ⇒ 1 Ed.Bren, Bucuresti, 2008
 RIRF > RIRF ⇒ 0
 0
(22) [2] Nigel Da Costa Levis, Energy risk modeling,
Cν > Cν max ⇒ 2 Ed.Palgrave Macmillan, 2005.

Cν ⇒ Cν ∈ [Cν 0 , Cν max ] ⇒ 1 [3] Seiciu, P. L., Opran, C., Seiciu, D. C.,
C < C ⇒ 0 Managementul proiectelor ingineresti, Ed.
 ν ν0 (23)
POLITEHNICA Press, 2009.

ISSN: 1790-2769 349 ISBN: 978-960-474-182-3

 Proceedings of the International Conference on RISK MANAGEMENT, ASSESSMENT and MITIGATION

[4] *** ISO 31000 – Risk Management Standard,

Ottawa February 27, 2008.
[5] ***, Carta Verde a Energiei, Final report on the
Green Paper “Towards an European Strategy for the
Security of E nergy Supply”, European Commission,
2002.
[6] http://eescopinions.eesc.europa.eu/viewdoc.aspx?
doc=//esppub1/esp_public/ces/ten/ten263/ro/ces986-
2007_ac_ro.doc
[7]. http://stec.central.ucv.ro/finante/arhiva/arhiva_nr5
/romana/21_RO.doc, 15.12.2008

ISSN: 1790-2769 350 ISBN: 978-960-474-182-3

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