What constitutes risks for power utilities? Historically, they’ve prioritized immediate, short-term economic risk above all others. But this singular focus can be short-sighted. A true risk management approach should help identify, assess, and prioritize any potential challenges and outcomes over the long term.
Some asset-intensive industries are broadening their risk assessments to include geo-political factors, supply-chain considerations, and threats posed by environmental or climate issues. Allowing them to make informed decisions about how to allocate their capital, develop strategies that mitigate those risks and optimize performance.
While each utility will have its own risk value framework and challenges relevant to them, all effective risk management strategies should cover:
Whether you’re looking to optimize your current risk management process, implement a more far-reaching approach or just starting to look beyond the boundaries of cost, you’ll find a comprehensive overview below of some key constraints and risks that you should be aware of and mitigating against, so you can determine the best course of action to reach your goals.
Then with the addition of the right technology, utilities can transform their investment objectives into measurable metrics, which can then be used to forecast the potential performance and risks of an investment, and in turn inform decisions about where and how much to invest.
The concept of risk management grows more complex each year. New threats, increased weather events in terms of quantity and severity, the evolving role of the energy consumer to prosumer, utilities must have a clear eye on what is coming down the road and have a clear understanding of the potential impacts or trade-offs they may have to contend with in the future.
But risk can look different for each utility. And a key part of risk identification comes from the understanding of the organization’s risk tolerance. What’s a more likely scenario for your utility: that your assets fail in service (based on age, general condition, etc.) or from an external factor, like an extreme weather event?
Once a risk is identified, the team needs to calculate the probability of that event taking place, the likelihood it will lead to a failure and then the consequence of that failure.
On a scale of one to five, one representing a very low risk and five a very high risk, utilities can tier the exposure they face. One utility may need to be on high alert when it comes to vegetation management because of an elevated risk of wildfires.
Another may be able to do fewer interventions in area A versus area B, because area A is very remote with isolated infrastructure and a low risk of an explosion taking place, but area B is near an urban area with many feeders, and an explosion would have dire consequences.
A comprehensive investment strategy that uses a long-term view of these constraints and considers all potential returns and risks associated with investments is the only way to determine the best course of action.
Overall, capital planning software can provide users with a wide range of tools and resources to better understand the risks they face, and plan how to avoid or mitigate them. It is important to have both short- and long-term views of these issues and the multiple factors that can impact them.
When considering short-term and long-term economic risks in capital investment planning, several key considerations should be kept in mind:
It is important for capital investment planning to consider and mitigate supply chain risk to protect the utility’s bottom line and maintain a competitive advantage, by evaluating the following:
Utilities can develop a robust reputational risk management strategy that will help protect the company’s reputation, which is critical for the success of any capital investment plan. Several key considerations could be made:
It’s important for capital investment planning to consider and mitigate performance risk by investing in quality control measures and monitoring, including a robust contingency plan in case of service failure to minimize the following potential risks:
Good capital investment planning involves identifying potential risks and impacts associated with climate change and taking steps to mitigate or adapt to those risks, which could comprise:
In capital investment planning, identifying potential risks and impacts associated with the environmental footprint of the assets being invested in, and taking steps to mitigate or adapt to those risks is key. This process might consider:
Regulatory risk management in capital investment planning includes identifying potential risks and impacts associated with government regulations and laws, and complying with or adapting to those regulations, in ways such as:
In capital investment planning, asset-level risk management involves identifying potential impacts associated with investment assets and taking steps to mitigate or adapt to those risks. Some considerations to keep in mind include for the assets being invested in:
An ideal approach to risk management is both a top-down and bottom-up method, one that considers the various types of risks outlined above and handles those at the project level, so that risk-reduction strategies at the portfolio level becomes easier to manage.
Capital planning technologies can support decision makers in achieving a balance between risks, costs, and performance of assets and critical infrastructure by providing them with a comprehensive and integrated view of all relevant data and information. Using an AIP solution, decision makers can:
The benefits of a risk management approach are clear. Managing and balancing risks, costs, and the performance of assets and critical infrastructure are central to effective capital investment planning. It won’t help you predict the future, but it will let you plan for it.