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Heidi forbes women in electricity networking event
- 1. Women in Electricity Networking Event Electricity Trading Risk Management Maturity and Carbon Legislation Update August 2013
- 2. Electricity Trading Risk Management Maturity
- 3. © 2013 Deloitte Touche Tohmatsu3 Maturing of the Electricity Trading Risk Management Framework Market participants are moving to / have moved to an integrated approach Maturing Risk Management Framework – more sophisticated risk measurement techniques • MW limit • Front Office • Limited Middle Office • Trading policy vs risk policy • Spreadsheets limited quantification Initial/Ad-hoc • MW limits • Front & Middle Office • Limited risk governance and oversight • Business units manage their own risks • Fragmented in house systems and spreadsheets • Some specialist skills Fragmented • MW limits to @risk limits • Well articulated policies, procedures and governance structures • Portfolio wide view with @risk measures such as EaR, VaR • Stress test/scenario analysis • Sophisticated skill sets Integrated Strategic ?
- 4. © 2013 Deloitte Touche Tohmatsu4 Structural Change is Driving Strategic Review Where do returns reside within the supply chain? Strategic Review Extracting value along supply chain Asset optimisation Wholesale price decline Accounting standard changes More sophisticated approaches to retail Shifting carbon and renewable policy Gas supply / demand imbalances Destruction of demand
- 5. © 2013 Deloitte Touche Tohmatsu5 The Risk and the Return Balance Risk measurement is more sophisticated but is it linked to returns? • More sophisticated risk measurement techniques can provide transparency around risk exposures • As risk measurement techniques have matured, the ability to make historical returns has become more difficult • Are returns linked to risk internally? • Do you still want to maintain current level of risk if returns are decreasing?
- 6. © 2013 Deloitte Touche Tohmatsu6 Capital Adequacy and Returns Existing financial institution practices - relevance for the electricity industry ? Market Risk Credit Risk Operation Risk Financial Liquidity Capital Adequacy Similar concepts employed that model Value at Risk and Earnings at Risk are used by financial institutions and overseas electricity companies to understand if the entity is sufficiently capitalised
- 7. © 2013 Deloitte Touche Tohmatsu7 Capital Adequacy, Capital Allocation and Returns Decompose return on capital by business unit to improve risk/return decisions Market Risk Credit Risk Operation Risk Financial Liquidity Market Risk Credit Risk Operation Risk Financial Liquidity Market Risk Credit Risk Operation Risk Financial Liquidity Linking risk and return can help inform strategic decisions What is the return on the capital employed?
- 8. © 2013 Deloitte Touche Tohmatsu8 Maturing of the Electricity Trading Risk Management Framework Market participants are moving to / have moved to an integrated approach • MW limits to @risk limits • Well articulated policies, procedures and governance structures • Portfolio wide view with @risk measures such as EaR, CFaR, VaR, PFE • Sophisticated skill sets • MW limits • Front & Middle Office • Limited risk governance and oversight • Business units manage their own risks • Fragmented in house systems and spreadsheets • Some specialist skills • MW limit • Front Office • Limited Middle Office • Trading policy vs risk policy • Spreadsheets limited quantification Initial/Ad-hoc Fragmented Integrated Strategic • Performance measures such as return versus risk taken • Capital allocation is based on risk adjusted performance • Risk management is a source of competitive advantage • Sophisticated skills sets to strategic oversight Maturing Risk Management Framework – more sophisticated risk measurement techniques
- 10. © 2013 Deloitte Touche Tohmatsu10 Two Different Parties with the Same Target 5% reduction by 2020 Australian Labor Party - mandatory scheme The Coalition - voluntary scheme
- 11. © 2013 Deloitte Touche Tohmatsu11 ALP - The Carbon Pricing Mechanism What is currently in place and the possibility of new direction under Rudd Fixed Price Period or Carbon Tax Floating Price Period or ETS 2012/2013 2013/2014 2014/2015 International Linking to EU – Australian Potential Price Taker $23 $24.15 $25.40 Currently trading around $6.50AUD Rudd: Early removal of fixed price period? Would require Senate approval as set within Clean Energy Act. Draft legislation released for comment by 15 August
- 12. © 2013 Deloitte Touche Tohmatsu12 The Coalition - Repeal of the Carbon Pricing Mechanism Is it really feasible? It’s all about the Senate Composition Co Gains Majority House of Reps and Senate Text Text Coalition Wins Election Gains Majority House of Reps and Labor Doesn’t Oppose Gains Majority House of Reps and the Senate via Independents Double Dissolution – Now Less Likely?
- 13. © 2013 Deloitte Touche Tohmatsu13 The Coalition - Repeal of the Carbon Pricing Mechanism Is it really feasible? Senate Composition • Revised Senate composition takes effect July 2014. • 40 contested seats 3 of which are Greens • Historically Senate swings have not been significant. • Since 1984 only one swing greater than 2 seats which was when Rudd came to power in 2007. • Even if Senate composition does fall in the Coalitions favour in July 2014 the Repeal Bill would still need to pass through parliament and unwind the administrative framework created under the Clean Energy Finance Package. Double Dissolution Dilution of CPM • ‘The Abbott Proof Fence’ • Other alternatives for the Coalition include a dilution of the Carbon Pricing Mechanism, however, nearly all the appropriate levers for dilution such as emissions thresholds, changing the fixed price and reducing the penalty for non-compliance to zero are all contained within the Clean Energy Act and their amendment would require clearance through the parliamentary process. • Double dissolution requires legislation to fail twice with a period of 3 months between each submission. Then a new election is called and the new parliament needs to be sympathetic to the agenda. • There have been six double dissolutions in Australia’s history, on two occasions the government achieved its legislative aims. The closer election then perceivably the less ‘mandate’ for repeal.
- 14. © 2013 Deloitte Touche Tohmatsu14 The Coalition’s Direct Action Policy An incentive based scheme with no mandatory obligation Direct Action Plan Similar to Water Buyback Scheme in MDB Emissions Reduction Fund Reverse Auction Pricing High Level Policy Similar to International Scheme called CDM Extension of the Carbon Farming Initiative
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