IDENTIFYING RISK FACTORS IN THE
GENERATING SECTION OF THE POWER PLANTS
THE N.V. ENERGIE BEDRIJVEN SURINAME CASE
By
SHUNG TAK, CHAN (SRFHR0407010)
Supervised by Dr. Hans van Ees
This paper was submitted in partial fulfillment of the requirements for the Masters of Business Administration (MBA) degree at the Maastricht School of Management (MSM), Maastricht, the Netherlands, May 2009.
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ACKNOWLEDGEMENTS
I would like to take this opportunity to express my sincere appreciation to my thesis advisor, Dr. Hans van Ees, for his tremendous guidance and support through my research.
To my employer “N.V. EBS” for giving me the opportunity and support to enrich my knowledge and skills through this MBA course.
My sincerest appreciation to all the participants in the interviews who gave freely of their valuable time. These participants are from N.V. EBS, Suralco and SPCS.
I also owe deep appreciation to Mr. Hans Lim A Po and his administrative team from FHR Lim A Po Institute, for their tremendous guidance, support and good accommodations facilities.
Finally, to my ever loving family, especially my wife Iris and my sons Yau Tchu and Yau Fa for their patience, support and encouragement all the times.
Sincerest thanks to all.
Shung Tak CHAN
May 2009
ABSTRACT
Electrical energy is in this modern world indispensable. This commodity cannot be stored and needs to be generated at the instant when it is needed. The customers also demand for continuity and reliability of this commodity. Historical data shows that blackouts and rolling blackouts (i.e. load shedding) are results from shortages of electrical power in the power plants.
The Surinamese electrical energy sector is regulated. One vertically integrated electricity company “N.V. EBS” provides the service through its generation, transmission and distribution sections. In addition, electrical energy is purchased through PPAs with IPPs which N.V. EBS is very dependent on. This company is the sole supplier of this commodity and has to protect its reputation.
Can N.V. EBS (as a monopolist) guarantee a delivery of continuous and reliable electrical energy? The problem statement is how to achieve an optimal guarantee of electrical energy supply to customers in Suriname. The guarantee is a direct derivative from the conditions of the power plants. The general objective of this study is to help the N.V. EBS to understand the involved risks of the different interconnected power plants for optimal dispatching of electrical energy. In order to improve the service of electrical energy supply, an integral approach for the identification of existing and potential risk factors of the power plants is conducted where the role and the risky ness of the power plants are determined. This information will give better insight for the N.V. EBS in order to transform into a sound dispatcher.
The method use in the research is a top-down approach with the pre-determined variables or sets of variables from the research questions, related to the objectives of the research i.e. the role of the different power plants, risk models, risk factors, ranking and prioritization. Data gathering is done through interviews with experts and management in the generating section of the power plants. An integral methodological approach of the assessed risks is defined and tested for N.V. EBS. The transformation into a sound dispatcher is described with the organizational changes needed to achieve this goal for N.V. EBS.
The overall finding is that N.V. EBS can guarantee continuous and reliable electrical energy.
The guarantee lays in the defining of the weighting matrix of the power plants in risky ness that serves as and input for the improved methodological framework with decision tree for dispatching electrical energy by N.V. EBS. These topics are the centre focus of this research and are in details in this paper further described.
LIST OF FIGURES
Figure 1 General overview of the flow of electrical energy from generating to
transmission to distribution and to customer………...2
Figure 2 Suriname energy consumption forecast………...3
Figure 3 Research model for the thesis topic………8
Figure 4 AU-NZ Risk Process………....14
Figure 5 General risk-based maintenance (RBM) model ………..17
Figure 6 Enterprise Risk Scorecard……….19
Figure 7 A block diagram illustrates the research design………...22
Figure 8 A methodological framework and decision tree for dispatching electrical energy………53
Figure 9 Improved methodological framework with decision tree for dispatching electrical energy………...54
LIST OF TABLES
Table 1 Weighting matrix of the categories vs. the power plants………..51GLOSSARY
Definitions
Blackouts:
Power was lost completely
Brokopondo Agreement:
A power purchase agreement of Hydro electrical energy between Suralco LLC and Suriname.
Annually the amount of 800 GWh of electrical energy is dispatched.
GWh (Gigawatt-hour):
One billion watt-hours of electrical energy. A unit of electrical energy, which equals one gigawatt of power used for one hour.
Load shedding or rolling blackout:
Controlled way of rotating available generation capacity between various districts or customers, thus avoiding wide area total blackouts
MW Megawatts:
The unit of measure for active power in power systems. When only linear loads are considered, this quantity is an indication of the amount of power. This power is the sum of the losses and also the actual rate at which work has been done by the electrical energy in turning motors and obtaining mechanical energy etc. A 1000 kilowatts make up one megawatt or MW.
MWh Megawatt-hour:
The unit of measure for electrical energy. It is the amount of electrical energy, which is consumed by a load or is generated by a generator. It is equivalent to the situation when the rate of electricity demand or supply (also called the power) is one megawatt and is sustained for a one-hour period by the load or generator. It is also equivalent to 3600 Mega joules of energy.
SCADA:
The Supervisory, Control and Data Acquisition system. In process control, programmable logic controllers (PLCs) pass information to the central SCADA system, which collates and presents it to an operator who then has a systems view of the plants control system. The operator then uses the information from the SCADA system to implement control changes to the control system using this same SCADA system.
Abbreviations
DEV Dienst Electriciteitsvoorziening ERM Enterprise Risk Management EPAR Energie voorziening Paramaribo
COSO Committee of Sponsoring Organizations GDP Gross Domestic Product
HFO Heavy Fuel Oil
HMI Human – Machine Interface
ICT Information and communication technology IPP Independent Power Producer
ISO International Organization for Standardization
kV kilo Volts
N.V. EBS N.V. Energie Bedrijven Suriname
SPCS Staatsolie Power Company Suriname SBU Strategic Business Unit
PPA Power Purchase Agreement RBM Risk Based Maintenance Model ROI Return On Investment
TABLE OF CONTENTS
ACKNOWLEDGEMENTS ...iv
ABSTRACT……...v
LIST OF TABLES ...vii
GLOSSARY…...viii
CHAPTER 1 INTRODUCTION...1
1.1 GENERAL ... 1
1.2 Background information... 2
1.3 Scope of research... 6
1.3.1 Research area ... 6
1.3.2 Reason for choosing this topic ... 6
1.3.3 Research problem ... 6
1.3.4 Validity in management field... 7
1.3.5 Research objectives ... 7
1.3.6 Research main question ... 7
1.3.7 Research central questions ... 7
1.3.8 Research model ... 7
1.4 Limitations ... 8
CHAPTER 2 LITERATURE REVIEW (A description of alternative approaches to risk) ... 10
2.1 General... 10
2.2 Risk in different industries... 11
2.2.1 Industries... 11
2.2.2 Categories of risks... 11
2.2.3 Sub-summary ... 12
2.3 Probabilistic vs. Subjective framework... 12
2.3.1 Sub-summary ... 13
2.4 Risk models... 13
2.4.1 COSO ERM... 13
2.4.2 AU-NZ Risk model... 13
2.4.3 Risk-based maintenance (RBM) model... 15
2.4.4 Real-Time Risk Based Model ... 17
2.4.5 Enterprise Risk Scorecard Model ... 19
2.4.6 Sub-summary ... 20
2.5 Conclusion ... 20
CHAPTER 3 RESEARCH METHODOLOGY ... 22
3.1 General... 22
3.2 Research material ... 23
3.3 Research technique... 23
3.3.1 Method and data ... 23
3.3.2 Sample ... 23
3.3.3 Reliability ... 24
3.3.4 Analyzing data ... 24
CHAPTER 4 FINDINGS... 25
4.1 General... 25
4.2 Power plant SPCS ... 25
4.2.1 Data set ... 25
4.2.2 Findings ... 26
4.2.3 Summary ... 28
4.3 Suralco ... 29
4.3.1 Data set ... 29
4.3.2 Findings ... 30
4.3.3 Summary ... 31
4.4 EBS ... 32
4.4.1 Data set ... 32
4.4.2 Findings ... 33
4.4.3 Summary ... 34
4.5 Dispatch Centre ... 35
4.5.1 Data set ... 35
4.5.2 Findings ... 36
4.5.3 Summary ... 36
4.6 Conclusion ... 37
CHAPTER 5 ANALYSIS ... 38
5.1 General... 38
5.2 Part one: Unitization, Categorization and Inferences of findings for answering the research main questions ... 39
5.2.1 Research Central Question 1 ... 40
5.2.3 Research Central Question 2 ... 42
5.2.4 Research Central Question 3 ... 44
5.2.5 Research Central Question 4 ... 47
5.2.6 Research Central Question 5 ... 48
5.3 Part one: Conclusion... 50
5.4 Part two: Implementation of the results from part one to EBS. ... 51
5.4.1 Research Central Question 6 ... 52
5.4.2 Research Central Question 7 ... 55
5.5 Summary ... 55
CHAPTER 6 CONCLUSIONS, RECOMMENDATIONS AND FUTURE RESEARCH ... 57
6.1 General... 57
6.2 Conclusions ... 57
6.2.1 Role of the power plants ... 58
6.2.2 Risk models, risk factors, ranking and prioritization... 59
6.2.3 Dispatch Centre... 60
6.2.4 Changes in the organization of EBS... 60
6.3 Recommendations ... 61
6.4 Future research ... 62
REFERENCES……. ... 63
APPENDIX 1 LIST OF INTERVIEWEES OF SPCS... 65 APPENDIX 2 LIST OF INTERVIEWEES OF SURALCO ... 66 APPENDIX 3 LIST OF INTERVIEWEES OF EBS... 67 APPENDIX 4 LIST OF INTERVIEWEES OF
THE DISPATCH CENTRE OF EBS ... 68
CHAPTER 1 INTRODUCTION
1.1 GENERAL
The role of the power plants is very important for the continuous and reliable electrical energy supply, which is important for the development of the country. It is unimagined to stay without electricity in today’s high tech and modern world. The electrical energy sector has two forms namely de-regulated and regulated. Globally the trend is to move to de-regulated electrical energy environment. This is already highly improved in many developed countries.
Still in many developing countries, the Government controls the electrical energy sector. This structure, as the case of Suriname, may result in a not optimal service of the electrical energy.
The problem statement is how to achieve an optimal guarantee of electrical energy supply to customers in Suriname. The guarantee is a direct derivative from the conditions of the power plants. In order to improve the service of electrical energy supply, an integral approach for the identification of existing and potential risk factors of the power plants will be conducted.
The inputs of these identified risks from the different power plants will give better insight for the N.V. Energie Bedrijven Suriname (from this point on mentioned as EBS) in order to transform into a sound dispatcher.
Risks are present in every stage, from the planning phase to the design and construction phase and in the expansion phase. It is therefore important to identify risk factors in every stage, understanding them and put control mechanism to mitigate them. This will benefit the organization in performance and avoid negative criticism. Also by not proper understanding this issue will lead to loosing opportunities and facing with choosing the improper decisions, actions and planning. This will result in higher costs, inefficiency and ineffectively in the operation.
To understand the risks of the different plants in Suriname, an analysis of the regulated energy environment is necessary. It is important to distinguish the different role of the power plants in a regulated energy environment and understand how the risk appetites are formulated.
1.2 BACKGROUND INFORMATION
Electrical energy is important for the development of the economy of a country. It is a cornerstone on which the economy and the daily lives of the Surinamese citizens depend.
This essential commodity has no substitute and cannot easily be stored, so it must be produced at the same instant it is consumed.
The basic processes of electrical energy consist of a generating part, a transmission part and a distribution part as it is depicted in figure 1.
Figure 1 General overview of the flow of electrical energy from generating to transmission to distribution and to customer.
The generating part is in the power plant and may include steam turbines, diesel engines, or hydraulic turbines connected to alternators that generate AC electricity. Generators produce three-phase current at voltages ranging from 2,000 to 24,000 volts. This electricity must be transformed to higher voltages for efficient long-distance transmission.
The transmission part is the interconnection between power stations, through underground cables and overhead lines, and is terminate at substations.
The distribution part is where the voltage in the substations is reduced to the primary distribution voltage e.g. from 33 kV to 12 kV. This voltage is then supplied directly to large industrial users or is further transformed down to e.g. 227 V / 127 V for local distribution.
The goal of the modern-day power systems is to generate and deliver electrical energy to customer as reliably, economically, and safely as possible while maintaining the important operating parameters (voltage, frequency, and phase angles) within permissible limits.
The electrical energy sector in Suriname is still regulated by the Government. In a regulated market, the regulator decides the electricity price charged to consumers. Regulated electrical energy systems have been facing major challenges to generate enough resources for future development to cope up with the demand growth of electrical energy. Figure 2 gives the predicted relation of the base-, low and high scenarios of energy consumption against time for the Surinamese situation.
Figure 2 Suriname energy consumption forecast Source: IDB study 2008
EBS is fully Government-owned and has the monopoly position in the transmission and distribution of electrical energy to customers consisting of households (88%), commercials (9%) and industries (3%).
The power plants, which are contributing to the electrical grid, are:
- The EBS;
A Government-owned company with its thermal power plant.
- The Suralco LLC;
A subsidiary of Alcoa with its hydro- and thermal power plants. Part for the generated electrical energy is for own consumption for the refinery and melt shops. The rest of the available electrical energy is for the State according to the Brokopondo agreement and transferred to EBS for further transmission and distribution.
- The SPCS (Staatsolie Power Company Suriname);
An Independent Power Producer with its thermal power plant. The generated electrical energy is available for EBS for further transmission and distribution.
- Dienst Elektriciteitsvoorziening (DEV);
Small thermal power stations operated by Ministry of Natural Resources for rural areas and the interior.
While there may be some commonalities among the risk factors in the generating section of the different power plants, each risk is unique as for the different roles they play in the regulated environment.
History has shown that the electrical energy sector in Suriname has many shortcomings.
These shortcomings relate to the generating capacity of the power plants.
In late 2004 there where shortages of generating capacity from power plant of Suralco due to low lake level at the hydro-dam. Emergency power in the form of mobile containerize units where forced to be hired at an instant from the company “Aggreko”. The director of NH (natural resources) stated that this action was to mitigate the shortages of electrical energy and to prevent blackouts (where power was lost completely) and “load shedding" or a rolling blackout (controlled way of rotating available generation capacity between various districts or customers, thus avoiding wide area total blackouts). The Government’s opinion was that Suralco power plant should contribute electrical energy according to the Brokopondo agreement for 800 GWh annually. Suralco’s defence was that the low lake level the result was of a drought, an act of God, and thus classified as force majeure (Staat en Suralco oneens over verdeling kosten generatoren, De Ware Tijd; 02/02/2005). In the end, both parties had to split the bill for the services of the emergency power. In this case, the compliance and operation risks were present.
Another shortcoming was, when the power plant of EBS could no longer guarantee the electrical energy due to the increasing diesel fuel price (Stroomlevering verder onder druk.
Loadshedding onvermijdelijk, De Ware Tijd; 10/18/2008). EBS was not allowed to adapt it electrical energy tariff with the rising fossil fuel price. The tariff is still controlled and decided by the Government (EBS niet happy met voorstel energiecommissie, De Ware Tijd;
06/08/2006). In this case, the operation risk was present.
Due to the generating capacity struggle of EBS, an Independent Power Producer (SPCS) was granted the concession right by the Government to generate electrical energy also (Staatsolie bouwt elektriciteitscentrale voor energielevering aan EBS, De Ware Tijd; 05/06/2005). In this case, the strategic risk was present.
In August 2006, SPCS went into operation with a contractual PPA (power purchase agreement) between EBS and SPCS for purchasing 100 GWh of electrical energy annually.
This agreement did not execute effectively until today. As in the months that follow, heavy seasonal rain was filling the lake at the hydro-dam with high speed that there was a threat of excessive water, which had to be spilled in avoiding critical operation of the turbines. The Government intervened by dealing with Suralco to expand the purchasing contact to prevent spilling and waste of resources (hydro) and avert a float in the villages in vicinity and downstream of the dam. With this intervention, EBS made great use of cheaper hydro electrical energy and was able to manage its cash flow better by using less thermal generation with fossil fuel (EBS zit goed op stroom, De Ware Tijd; 06/06/2008). In this case, the strategic-, compliance and operation risks were present.
On October 5, 2008, EBS announced through news ads and TV spots to the households and industries to reduce the electrical energy consumption. The reason was that the power plant of Suralco had to reduce its generating capacity due to preventive maintenance at the hydro- dam (Verlaagde weekend-energie door daminspectie Suralco, De Ware Tijd; 10/06/2008). As in this case, the dependency on one big power plant is crucial. In this case, the operation risk was present.
The historical data has shown that in certain times there is not enough generating capacity from the power plants. This is always the case when demand does not match supply. The
consequences are discontinuity of electrical energy supply, rolling blackouts (cutting off electrical energy at interval) and in the worst case a total blackout.
As there are more cases and the list can goes on and on, it is clear from the mentioned shortcomings that running power plants deals with risk and opportunities. An integral approach in identifying the risk factors of the generating section of all the power plants and dealing them with proper will assure better electrical energy for the Surinamese citizens.
The motto of every stakeholder must be Let there be continuous “light”.
1.3 SCOPE OF RESEARCH
The customers have constantly questioned the quality of service provided by the electricity company EBS. Today’s customers do not tolerate poor quality or discontinuity of electricity.
The guarantee of good service lies primary in the performance of the power plants. These are the places where the electrical energy is generated. It is therefore of great importance to asses the risks factors associated with the operation and strategic of the power plants. In the next paragraphs, the outline of this research will be discussed.
1.3.1 Research area
The research area is the associated risk in the generating section of different power plants and their role in the regulated electrical energy environment.
1.3.2 Reason for choosing this topic
A continuous and reliable electrical energy service is important for the electricity company.
Electricity is a commodity, has no substitute, and cannot be stored. The demand of electrical energy must be generated in the power plants at the same moment. If the demand-supply equation is not managed in an adequate manner, there will be total blackouts or rolling blackouts (cutting off electrical energy at interval). Shortages, breakdowns and maintenances are major aspects to consider as these factors influence the demand-supply equation.
1.3.3 Research problem
Can EBS (as a monopolist) guarantee a delivery of continuous and reliable electrical energy?
There should be a thorough understanding of the generating capacities of the different power plants and their future developments.
1.3.4 Validity in management field
Understanding the risk factors of the power plants will lead to creating and setting up control mechanism to mitigate these risk factors. This will guarantee the continuous and reliable electrical energy services. For the companies the benefits will be a positive financial position, avoiding and minimizing negative critics, operational effectiveness and contributing to economic growth.
1.3.5 Research objectives
To assess the current and potential risk factors in the different power plants
Formulate an alternative methodological approach to assure a better or excellent energy supply service by EBS
To assess the organizational changes required for EBS to transform into a sound dispatcher.
1.3.6 Research main question
Can the supply of electrical energy be improved through an integral methodological approach by using the assessed risks factors of the different power plants?
1.3.7 Research central questions
What is the role of the different generating sections of the power plants in a regulated environment?
Which risk models do the power plants pursue?
What are the existing and potential risk factors?
What is the operation and maintenance philosophy?
Are the different risks prioritized and what are the criteria?
How can EBS as the dispatcher of electrical energy guarantees improvement with the integral methodological approach of the assessed risk factors?
What are the organizational changes required for EBS to transform into a sound dispatcher.
1.3.8 Research model
The research model is depicted in figure 3. The approach is to focus only on the strategic and operation risks in the power plants that are relevant for the performances. There are also financial risks but these will be limited in this research. The primary focus is thus the
continuous and reliable service of electrical energy contributed by the different power plants.
An assessment of the strategic and operation risks for the different power plants are then conducted with in mind the different role they fulfill in the regulated energy environment.
Figure 3 Research model for the thesis topic.
The next step is to identify the crucial risks and then tries to incorporate in the electricity company (EBS) risk-base for a better understanding and judgment to optimize strategic and operation performances. EBS is the sole provider (monopolist) of electrical energy directly to customers and is accountable for this service. The integral methodological approach of the assessed risks will be formulated and tested in EBS. This will result in a transformation of EBS into a sound dispatcher thus optimize the performances and mitigate poor services. The follow-up is to establish the conclusions and recommendations for eventually organizational changes if implementing this formulated methodology.
1.4 LIMITATIONS
The limitation of this research is that the results are case specific and may not be applicable for other similar industries. The limitations are:
Monopolistic position of EBS
Surinamese regulated electrical energy environment
Distinguish only the role of the power plants in the regulated energy environment and not the structure.
Strategic.
risks
Operation.
risks
Financing risks
Power plant 1
Power plant n
Identified Risk factors
Integral Methodology
EBS case
Conclusions
&
Recommendations
There is no international interconnection between the transmission networks.
Interconnected power plants in the EPAR (“Energie voorziening Paramaribo” i.e.
supply of energy to Paramaribo and surroundings) system.
The recommended process changes for EBS are limited to Power Plant and Dispatch sections in mitigating operations and strategic risk.
CHAPTER 2 LITERATURE REVIEW
(A description of alternative approaches to risk)
2.1 GENERAL
This Chapter deals with some related background information on risks for this research.
Various studies have been done on identifying the risk factors in different industries. Many policies and strategies regarding risk management have been developed to mitigate failure rate and uncertainty. Various models are adopted in the environment specific situations such as the case in the electrical energy environment.
The literature study begins with the description of risks involving in all kind of industries.
The identification of risks is a process where the generic ERM framework, a well-known and used model, is pursued by all industries for managing risks and mitigates the impact on the business. Different industries have different risks, but identification and handling process of these risks factors may be the same. For the identification purposes, risks are grouped in major risk areas and sub-areas.
Once the risks are identified and categorized the next step is to assess the probability and consequence. This is done in a probabilistic- and a subjective framework and the results are then prioritized.
A company can pursue several risk models. For enterprise level approaches, the generic models like the COSO ERM and the Australian – New Zealand risk model has been proven to work for the electrical energy sector. For businesses with valuable assets as in the power plant, a more comprehensive and in-depth framework at micro level is being used. This framework is based on the justification whether and when to plan a maintenance on a system and sub-system. The data collection and input for this risk-based maintenance model is nowadays improved with the development and aid of ICT (information and communication technology). Real-time data is collected and processed for better judgment by the decision- makers. At the end, the success of a business is measured through several indices related with the overall performance and the risks assessment. These factors must be balanced and managed which can be done with the Enterprise Risk Scorecard model to create value for all stakeholders.
2.2 RISK IN DIFFERENT INDUSTRIES
2.2.1 Industries
Risk has been recognized and dealt with several industries e.g. process plants, transportation, pipelines, environment, health etc. (Taylor J., 1994). Risk is defined in the different industries as the probability of loss. These losses may be of many kinds: loss of opportunity, production, equipment failure or breakdown, environmental damage, injury e.g., which have an overall impact on the financial status of the company. Every industry has different risks but the handling of these risks can be the same with the overall and general objectives to mitigate and eliminate risks. The objectives of the power plants are to manage the resource inflows and identify the impact of their disruption or termination, contingencies and measurements etc., then consider how best to manage and minimize or eliminate the risk factors. The resource inflow can be fossil fuel, scheduled preventive maintenance (PM), environment issues etc.
2.2.2 Categories of risks
The awareness of risk has changed in the recent years (Mitchell and Jones, 2007). In today’s business, one has to consider the multiple sources and type of risks he or she might encounter. A strategy has to be developed to mitigate these risks. This will not be reached only with the increasingly hours spent in boardroom brainstorming about risks, but every organization should develop risk policies for each risk category and having fully accountable risk owners.
As in the different industries, risks are divided into major areas and sub-areas for identification purposes. General the three main categories of risks are:
1. Catastrophic risk, 2. Strategic risk and 3. Operational risk.
These risks have the probability of resulting in failures for the business. These failures are not mutually exclusive. Catastrophic risk has to do with impact on the business due to external (originate in the business environment) and internal factors (originate within the company).
Strategic risk is when a company pursues an inappropriate strategy or drifting away from the core missions. This will result in exhaustion of recourses with losses at the bottom line.
Operational risk is when the company cannot deliver its products or services to key stakeholders in a satisfaction way.
Moeller R. (2007) has a more comprehensive approach of the business risk model.
There are four main risks – Strategic, Operation, Finance, and Information –, which are further subdivided into relevant risks in the main categories. Some examples are Process risk, Compliance risk, People risk, Credit risk, Technological risk etc. Thus, the risks are classified as the result of the impact and the effect that it has on business.
2.2.3 Sub-summary
The involvement of risks is in every industry present. Different industries encounter different kind of risks but the approach of risk identification and risk response may be the same. For identification purposes, risks are divided in major areas and sub-areas. The result of a risk is the probability of failure for a business.
2.3 PROBABILISTIC VS. SUBJECTIVE FRAMEWORK
The next step in the development of a risk model after categorizing the risks, is to assess the two measurable parameters involving each risk namely probability (or likelihood) and consequences (or occurrences). Weighting of these factors depends on individual (or group) perceptions and interpretation of risk and on historical data and events. An overall detail of knowledge of the studied environment is needed.
In the electrical energy sector, risk is approached in a probabilistic and subjective framework.
A probabilistic risk framework emphasizes a statistically descriptive form and is very complex, while the subjective framework imposes lack of robustness, transparency and repeatability because of no formal structured approach to include risk (G. Latorre, R. Cruz, J.
Areiz, and A. Villegas, 2003).
The probabilistic framework uses differently structured approaches like the Monte Carlo simulations, Fault trees and Event trees analyses. These structuring approaches define the failure logic to quantify the probability or likelihood of critical failures. These approaches are well-used techniques especially for random systems and equipment failure interval in a power plant. It is indented for internal risk factors because they can be easily accessed and controlled within its boundaries to mitigation core business damages.
A subjective framework has the advantage of capturing the subject matter expertise from the plant operators and managers in their daily operations. This group, because of their daily involvement and expertise, must formulate the best-input data and defining risk appetite. The disadvantage is that the dependence on the operators and managers is high, thus more subjective and this can influence the outcome of the analyses. This is the effect of missing a
formal structured risk approach. The consequence is that this approach will lead to individual perception and interpretation of risk.
Nevertheless, the subjective risk framework is a frequently used approach in the power plants because certain events are not yet recorded or missing, for example new installed equipments where failure rate is unknown. Assigning a probability in these cases is not possible.
2.3.1 Sub-summary
The weighting process of the identified risks is done with a probabilistic- and subjective framework. The advantages and disadvantages of both frameworks are briefly discussed. For the electrical energy section, the subjective framework is the most commonly used model.
2.4 RISK MODELS
This paragraph will focus on the applicable risk models for the thesis topic.
2.4.1 COSO ERM
For any activity whether implementation of a project, changing in condition and daily and routine operation, risk is the only given certainty. It is important to identify measure, assess and mitigate the effect of such risk. It is therefore not surprising that also the electrical energy section applies risks assessment and management (Wenyuen Li, 2005). In today’s world, risk cannot be managed in “silos”. As in a regulated electrical energy sector where an electricity company is typical vertical integrated (generation, transmission, distribution), a paradigm shift from silos approach to an enterprise level approach has to be realized. That is why it is recommended that the electricity companies should pursue the COSO risk model for achieving enterprise level risk management (online available at www.coso.org/Publications/ERM/COSO_ERM_ExecutiveSummary.pdf (2004).
2.4.2 AU-NZ Risk model
A commonly used risk model for the electrical energy sector is the AU-NZ (Australian – New Zealand) risk model (Risk management handbook, AS/NZS 4360:2004). The AU-NZ risk model provides a comprehensive framework for treatment of risk. This model imposes a generic one and is independent of any specific industry or economic sector. The design and implementation of risk management system are influenced by the various needs of an organization, its particular objectives, its products and services, and the processes and
specific practices employed. In figure 4 is the AU-NZ risk process depicted. As the figure shows, there are seven steps approaches – Establish the context, Identify Risks, Analyze risks, Evaluate the risk, Communicate & Consult, and Monitoring & Review.
Figure 4 AU-NZ Risk Process
Source: Risk Management Handbook, AS/NZS 2360:2004 handbook
Establish the context is where strategy, culture and organizational structure play an important part. The risk appetite is derived from these factors.
Identify risk is the phase where the current and possible risk events are being assess with questions like “what” and “how”.
CommunicateandConsult
Establish the context
• The strategic context
• The organizational context
• The risk management context
• Develop criteria
• Decide the structure
Identity Risks
• What can happen?
• How can it happen?
Analyze Risks Determine existing controls
Determine Likelihood
Determine Consequences
Estimate Level of Risks
Evaluate Risks
• Compare against criteria
• Set risk priorities
Accept Risks
Treat Risks
• Identify treatment options
• Evaluate treatment options
• Select treatment options
• Prepare treatment plans
• Implement plans
MonitorandReview
Yes No
Assess Risks
Analyze risks is the step where identified risk events are being analyzed and put against control plans to determine the likelihood and consequences.
The next step is the evaluation phase where the criteria of the organization (risk appetite) are put against the results of the risk analyses. The outcome of this comparison is to accept risks or not. If risks are not accepted then treatment plans should be engaged to mitigate these effects. Communication, Consult, Monitoring and Review are constantly active throughout the whole process.
This model is suitable for the power plants and the electricity company (Varadan S., Mittelstadt W.A., Aggarwal R.K., VanZandt V., Silverstein B., 2008). The biggest challenge is to adopt these specified guidelines from the standards to the specific environment. The organization’s culture and the ability to embrace changes play a crucial role of success because the model with it seven steps must be followed in the structural sequence. A cultural- and change management is therefore necessary.
2.4.3 Risk-based maintenance (RBM) model
The most important asset (key success factor) for a power plant is to have a good running and on time maintained piece of equipment. Managing and improving equipment availability with better prevention of failures will results in reliability and continuity in supply of electrical energy. Various studies have been done about equipment reliability improvement and management (Khan F., Haddara M., and Krishnasamy L., 2008). Many maintenance policies and strategies have been developed in order to minimize failure rate and improve equipments reliability and availability like corrective maintenance, scheduled maintenance, condition- based maintenance, and reliability-centered maintenance. The objective of these maintenance policies is to safeguard the availability of the system so they can perform as its required function at a given time or over a stated period of time. A well-known and general used Risk- based model (Arunraj J.M. (2007) is depicted in figure 5. The methodological approach here is to start with defining a major system and its subsystems. A major system in the power plant is comprised of several subsystems. The generator for example is a major system and rotating - , seal oil & lubricant -, cooling system is categorized as subsystems. The analysis is to focus on a total failure scenario and not on poor performance, or partial production scenarios. The next step is to investigate the failure modes of the system, and its associated subsystems (hazard estimation). The data-input comes from the power plant’s operators, which is then ranked in a fault trees and event trees. The quality of the input information depends greatly on human expertise, interest to the method and capability to access the information. In this
stage, the difference between continuous and non-continuous subsystems must be cleared.
With non-continuous subsystems are meant components that are not designed to operate continuously, such as alarm, emergency, and standby systems. These subsystems may suffer failures while they are in a non-operating state. The failures are not detected until the system is called upon to operate. These failures are often caused by manufacturing defects, corrosion, or mechanical fractures. These failures affect the availability of the system. An effective inspection strategy is required to ensure the availability of the system when it is needed.
After assessing the likelihood and consequences estimation, the result is analyzed in the risk evaluation phase and rank in high, medium and low risk units. The last two steps test the risk appetite of the organization and contingency policy in operation. A system must be secure for (n-1) contingency perspective to guarantee continuous operational. This approach (n-1) is a well-accepted planning practice where no loss of operation is experienced when any single component (for a possible n component) in the power plant fails. This means that there should be redundancy (reserve capacity) built in the system for continuously operation.
Figure 5 General risk-based maintenance (RBM) model Source: Arunraj, 2007
2.4.4 Real-Time Risk Based Model
The disadvantage of the earlier described Risk-Based Maintenance Model is that the quality of data input relies heavily on human factors. It should be emphasized that focusing on data retrieval and updated - as automatic as possible - to prevent risks analyses obsolescence, is very important.
Divide the system in to manageable units
Consider a unit
Hazard analysis
Likelihood estimation Consequence estimation
Risk evaluation
Identify high, medium and low risk units
Is risk acceptable?
Is there any other unit?
No No
Maintenance planning
Yes
Yes
End Begin
Real-Time Risk Monitors are now being used routinely to provide risk information for use by plant operators in managing the power plant more effective and efficient (Mili A., Hubac S., Bassetto S., Siadat A., 2008).
First, data is collected by software programs from the major – and subsystems. The data generates risk information for use in the day-to-day management of operations and provides an input for maintenance planning. The objective is to ensure that these activities are scheduled in such a way that high peaks in the risk are avoided wherever possible and the cumulative risk is low. They provide information on which components should be returned to service before particular maintenance activities are carried out and which of the remaining operational components are the most important to ensuring plant safety during specific maintenance outages. There is even software programs to control and monitor systems (Supervisory Control And Data Acquisition) and its subsystems which are integrated for the whole power plant. The user friendly HMI makes decision making very simple with risk bands that is presented as risk information in the form of colored displays that give the user a clear visual indication of the level of risk. This is normally done using a four band scheme as follows:
- low risk band where maintenance can be carried out with no restrictions, - moderate risk band where maintenance needs to be completed quickly,
- high risk band where severe time restrictions need to be imposed and compensatory measures may be required, and
- unacceptable risk band which is not entered voluntarily and immediate action needs to be taken to reduce the risk.
The risk information is sometimes presented in a three band scheme where the moderate and high bands are combined. Entering a higher risk band will also result in actions to heighten the awareness of plant personnel and often require higher levels of management involvement and approval to allow additional or continued maintenance activities.
Second, with the automated collected data the power system operator can made on-line contingency analysis to provide a continuous assessment of current power system conditions and vulnerabilities. This analysis is automatically updated periodically (such as every 10 min) and may consider several hundred worst-case contingencies. Based upon this information, the probability of falling below (or above) plant acceptance criteria can be determined.
Financial risk Perspective
Internal Business risk
Perspective
Innovation and learning risk
Perspective Customer risk
Perspective
2.4.5 Enterprise Risk Scorecard Model
An overall performance for the enterprise can be approach through several indices. As performances are measured through the Balance scorecard (Kaplan and Norton et al, 1996) so is also risks measured through the Enterprise Risk Scorecard. This model was adopted by Calandro and Lane (2006). The basic idea is that both performance and risk should be measured and managed to create value. Figure 6 depicts the Enterprise risk Scorecard.
The electrical energy sector is regulated and thus the electricity tariff is fixed. The challenges for these power plants are to operate efficient, cutting down cost and mitigate risks. It is interesting to investigate in the power plants if the Enterprise Risk Scorecard is already applicable and applied. Literature survey shows further on that risk is an uncertain event that if occurs, has a negative effect on the objective of an organization. Managing risk is a process where all stakeholders are involved. Processes, tools and techniques should be developed to cope with risks. The process steps for risk management can be done with quantitative and qualitative risk analysis (Moeller R., 2007).
Figure 6 Enterprise Risk Scorecard Source: Calandro and Lane
2.4.6 Sub-summary
The generic COSO ERM and AU-NZ risk model are accepted in the electrical energy sector and are applied at macro level for assessing risks. At micro level, risks are assessed with the risk-based maintenance model. The enterprise risk scorecard is a model for expressing the performance and managing risk process in a scorecard.
2.5 CONCLUSION
The literature review point out that risk is present in every business and industry. The assessment of risks involves every stakeholder of the organization. It starts with the company’s vision and mission. To reach the target objectives of an organization, a balance between performance and managing risks should be maintained. Organization in today’s business environment is dealing with risk in a broader way. Enterprise Risk Management is a common tool for doing business today.
The overall objective for the power plant is to strive for continuity, reliability, and keeping least cost option. A very well known Risk-based maintenance model is used as a basis for the data collection, identification and evaluation. In the fast changing technology world, ICT simplifies the data collection of events and make the identification and ranking of risks easier and faster.
In general, the electrical energy sector is facing many challenges. One is the constant pressure for more reliable and stabile power from the electricity provider(s). This is especially the case in a de-regulated electrical energy environment where the different entities - generation, transmission and distribution – with separate owners have to operate efficient and effectively to reduce cost. In the de-regulated environment, the customers (end-users) have the obligation to choose and switch to any electrical energy provider. These providers search for the best offering from the power generating sections. Competition is encouraged alone the whole process line.
On the other hand, in a regulated electrical energy sector one electricity company has been granted for the operation of the three entities: generation, transmission and distribution, which are vertically integrated in one company. This does not necessarily imply a monopoly, only that competition is regulated and less intense.
In both cases, the Government has put emphases on the utilities to guarantee continuously electrical energy because it affects the development of the economy, which results in socio benefit for the country.
The objective of the different entities, generation, transmission and distribution, is to safeguard the electrical energy supply. This thesis will focus only at the primary source namely the power plants in Suriname where electrical energy is generated. As in the past there was only one power plant in Suriname, nowadays there are four power plants tide in the transmission grid. The development for the future is unpredictable and for now it is of importance to maximize the output of these power plants in a most efficient and effective way. Future incremental changes have to be considered and planned. To achieve this goal, the power plants have to identify the risk factors effecting their operation and strategic goals for pursuing the continuity of service to the whole nation without any interruption.
The electricity company with its Dispatch Centre plays a crucial role in the demand-supply chain. It is in this centre where all the Power Purchase Agreements (PPA) are performed.
This centre must be able to oversee in advance the availability of the different power plants, especially in the Surinamese case where there are few generating stations.
In the process of identifying risk factors in the generating section of the power plants, the relationship and the applicability of the topics from the literature study are being investigated.
The investigation consists of the following major steps:
Determine the power plant’s existing vision and mission.
Determine the power plant’s risk model
Determine the evolvement of the used risk model Determine the major risk areas and sub-areas Determine the risks assessment and appetite Determine the process maintenance schedules
Determine the relationship with the dispatcher of electrical energy (EBS)
Further explanation on the investigation is described in the research methodology Chapter 3.
CHAPTER 3 RESEARCH METHODOLOGY
3.1 GENERAL
This chapter explores the research technical design as depicted in figure 7 more in-depth.
Figure 7 A block diagram illustrates the research design
The research was conducted in the power plants of Suriname. The research strategy was to collect data by taking semi-structure interviews with the key persons responsible for the generating section of the power plants. The sample for the data collection consisted of operational-, maintenance and management staff. An individual and focus group semi- structure interview technique was used for more broad view where then the qualitative analysis approach was followed. In this phase the risk models or equivalent models of the power plants where reviewed and the similarities and differences were analyzed. An integral methodological approach of the assessed risks was defined and tested for EBS. The transformation into a sound dispatcher was described with the organizational changes needed to achieve this goal for EBS
Analysis Interview
for Identifing risk factors of the different power plants Plant A:
……..
Plant B:
……..
Literature review - risk models - industries - regulated environment - mitigation plan - ERM etc
Sound dispatcher
EBS case Secundary
data
Primary data
Qualitative
analysis Improvement
Integral approach
Results
3.2 RESEARCH MATERIAL
The research material for the topic of this thesis consists of:
- Primary data through interviews with keys stakeholders.
- Secondary data through literature studies focusing on risks, different industries, risk framework, control and mitigation processes, ERM and implementation, etc.
- Records (maintenances, failures, accidents) of the power plants.
3.3 RESEARCH TECHNIQUE
3.3.1 Method and data
The aim of the study is to help the electricity company EBS to get a better understanding of the involved risks of the different power plants for the dispatch operation of electrical energy.
The result will benefit the improvement of the quality and reliability of electrical energy supply.
The literature review and secondary data serve as the basis for a better understanding of the risks involved with the generating section of a power plant. Several risk model approaches will be questioned and an in-depth exploration of the existing and used models of the power plants will be conducted.
The method use in the research is a top-down approach with the pre-determined variables or sets of variables from the research questions. Data gathering will be through interviews with experts and management in the generating section of the power plants. The interview will focused on “what” are the risks and “why”. Further on the “how” to mitigate, prioritize and ranking. The independent variables may consist of organization structure, culture, risk appetite and human factors. The moderate variables are the different role of the power plants in the regulated electrical energy environment. The dependent variables are the various potential risks the dispatcher has to encounter and manage to mitigate the effects.
3.3.2 Sample
The studied objects are the four power plants of the three different entities in Suriname namely Suralco, SPCS and EBS (also dispatcher)
The selection of the sample is focused on plant operators, maintenance crew, mangers and decision makers for their expertise. This will limit the sample size to less then 20.
3.3.3 Reliability
To achieve high reliability of data, the interviews are mostly conducted in focus group where the subjectivity is minimized. The personal interviews with the managers and decision makers will complete the data set.
3.3.4 Analyzing data
After assessing the different risks factors, the data is categorized and grouped. The risk factors are then prioritized and serve as input for the integral methodological approach for the dispatcher for day-to-day operation, which leads to improvement in this function.
CHAPTER 4 FINDINGS
4.1 GENERAL
The general objective of this study is to help the electricity company EBS to understand the involved risks of the different interconnected power plants for optimum dispatching of electrical energy. To do so, data is collected from the different power plants with their role in the regulated energy environment.
The data sets are derived from the interviews with the different stakeholders. The selection of the interviewees is based on the experience and expertise in- and around the power plants.
The interviews are focusing on the role of the power plants, risk models, risk factors, operation and maintenance - and prioritization and ranking philosophy. The purpose is to assess the risky ness of these power plants.
4.2 POWER PLANT SPCS
The power plant of SPCS consists of two diesel generator sets of 7.5 MW each (an installed capacity of 15 MW) and running on HFO (Heavy Fuel Oil). This power plant produces electrical energy since August 2006 and operates as a subsidiary of State Oil Company. This co-generation plant produces also heat (steam), in the process of generating electrical energy, for the oil refinery in the surrounded area. With the expansion vision of State Oil Company in its refinery capacity, SPCS has to adopt also the strategic plan for increasing its electrical generating capacity and secure the heat demand. Currently SPCS is considering installing an additional 15 MW of generation. The current PPA is to supply 100 GWh and delivers 15 MW, approximately 10% of base load to EBS.
4.2.1 Data set
The data is gathered by carrying out interviews with a focus group consisting of the employees directly involve with the power plant. These are Manager, Superintendent, Operation Supervisor, Maintenance Supervisor and Electrical Engineer. The experience in this group varies between inexperience to experience respectively 1 year of working skills to many years. The place of interviews is at the power plant of SPCS on Monday April 6, 2009
and last about two hours. A focus group is chosen because of the researcher time-frame and the availability of the interviewees for this research.
The interviews are semi-structure with flexibility in question design and follow up, especially in a focus group with diversity of expertise. Questions are asked to every participant of the focus group and there is no dominator noticeable that monopolizes and influences the answers. It is further noticeable that the respondents in this focus group are willing to corporate and give complete response to the questions.
The details of the interviewees are in appendix 1.
4.2.2 Findings
The electrical energy business is a new branch of core business for State Oil Company. SPCS operates as a SBU and arises from the Corporate Vision 2020. According to the power plant manager, this SBU is a challenge for the State Oil Company for entering into the electrical energy sector. Equipped with the Corporation’s management skills and experience, the power plant manager hopes to succeed its mission. The rest of the interviewees agree that SPCS will add value to the Corporation.
All the interviewees agree that this SBU adopts the overall strategic, operational, reporting and compliance rules of the Corporation. They understand that the oil and electricity businesses are different. That is why this SBU strives to adopt the existing best practice proven model to its business environment and learn from the peers i.e. from the power plant of EBS and own Corporation’s small emergency back-up power plants.
The power plant Manager and the Superintendent are responsible for the formulation and description of processes. Both agree that these tasks are doable due to the advantage of having processes of the Corporation that mostly are ISO certified and accessible for using in the SPCS power plant. The well-proven standardized processes in the Corporation’s oil business can be easily adopted for the electrical energy environment.
The Operation Supervisor, Maintenance Supervisor and Electrical Engineer find the execution of processes with the ISO certification structural and effective. They all agree that SPCS still has to standardize some specific processes regarding the generation of electrical energy to get an ISO certification. Their input to the overall process is thus important.
The focus group does not know and have not heard about the COSO ERM framework or AU/NZ risk model. The interviewees recognize some part of these frameworks when confronting with the content. The focus group further states that this SBU does not pursue a specific risk model. Their risk model does have the essential components of identification-, analysis-, evaluation-, response process and communication. They agree that their risk process is not so structural and formal like the COSO ERM framework and the AU/NZ risk model and that is limited to department or division level. Thus a more silos approach, managing one risk at a time and not holistically.
The overall opinion of this focus group is that in the quantitative risk analyses process, the probabilistic approach is used for the justification of a new project or a project affecting high financial consequences. For existing processes and sub-processes, the overall approach is a combination of subjective and probabilistic method with skewing to the subjective method.
The power plant Manager explains further that the ranking and prioritizing of the assessed risk factors rely on experience of the appointed team that participates in the risk process of a project or system and is highly subjective. The remaining interviewees agree with this statement.
The Superintendent, Operation Supervisor, Maintenance Supervisor and Electrical Engineer agree that they have to manage the costly assets. Their priority of ranking varies from manufacturing recommendation to fault events to human judgment. Their opinion is that the working force will achieve higher goals if they adopt the learning process.
The power plant Manager states that he is responsible for the learning and training programs so that the working force can make better judgment for the maintenance and operation of the power plant.
The power plant Manager also states that he is responsible for contracting and hiring experienced personnel for key processes to become competitive. He strives for empowerment in this organization and let everybody knows their role and accountability. The communication is from top-down and vice versa and across. The rest of the interviewees agree to this statement.
All of the interviewees state that SPCS has a good infrastructure in fuel pipeline from the refinery that guarantees the fuel intake. Their opinion is that SPCS operates optimum, which results in cost and time reduction, by having a sound procurement and purchase system for major- and minor parts and consumables. Owing to this, the organizational external risks i.e.
depending on suppliers are mitigated significantly.
All of the interviewees state that the corporate evaluation process is not supporting performances with risk management. This is still a vague and new concept. The employees are review from their performance indices.
The power plant Manager states that at this moment, the PPA is not adequate executed and the supply of electrical energy to EBS is merely 25%. The below-target realization is due to the low off-take by EBS, as a result of the availability of excess hydropower from Afobaka power plant. The sole customer under this PPA is EBS. Nevertheless, the need for expanding the installed capacity is under debate and confidential at top level of the Corporation. The rest of the interviewees agree with the low off take of electrical energy but do not have an opinion about the expansion plan. This is above their competence.
All of the interviewees state that the objective is to be available, contribute at any moment to EBS, and make a profit for further existence.
4.2.3 Summary
The findings of SPCS are listed below.
a) SPCS is a young and learning organization with minimum experience in running a power plant.
b) SPCS aspires to guarantee continuity in electrical energy supply.
c) SPCS uses ISO certified models from the Corporation and adapts to its organization.
d) SPCS uses no specific risk model but recognizes part of elements from the COSO ERM or AU/NZ risk model i.e. the identification-, evaluation-, response process and communication. The risk processes have a more silos then holistically approach.
e) SPCS empowers the work force, communicates from top-down and vice versa, and across and holds each individual responsible for his or her actions.
f) SPCS uses probabilistic approach for justification of new project.
g) SPCS uses probabilistic and subjective approach for existing processes with more emphasis on the subjective approach.
h) SPCS prioritizes and ranks risk factors on organization and personal experience.
i) SPCS maintenance philosophy ranks from manufacturing recommendation to failure rate to human judgment.
j) SPCS has minimum suppliers threat.
k) SPCS wants to expand its installed electric generating capacities.
l) SPCS PPA contract with EBS is not optimal executed.
m) SPCS measures only performances indices and no risk management indices.
4.3 SURALCO
Suralco is a subsidiary of ALCOA and operates as an independent company that owns and operates generation, transmission and distribution in the southern part of Suriname – from Afobaka to Paranam. This system contributes and serves to the Surinamese power system as the main source of power. Suralco operates two power plants.
1. The Afobaka Hydro Power Plant consists of six turbine generators and an installed capacity of 189 MW (3x33 MW and 3x30 MW turbines). The generated electricity is transported from Afobaka to Paranam through a 161 kV transmission double circuit. A part of this electrical energy is used for the alumina refinery and the rest is transferred to the Government according to the Brokopondo Agreement, a PPA between Suralco and the Government of Suriname. After closing of the Suralco aluminum smelter at Paranam in 1999, the availability from the hydro electrical energy for the Government (i.e. to EBS) has increased considerably, especially with the high seasoning rainfalls resulting in the high water inflow into the lake of the dam. This covers almost 90% of the load of EBS.
2. The Paranam Thermal Power Plant has an installed capacity of 78 MW and is located at the Suralco alumina production plant in Paranam. The main objective of this power plant is to supply heat and electrical energy (co-generation plant) for the Suralco operations. This power plant does not contribute to the PPA.
4.3.1 Data set
The data is gathered by carrying out interviews with a focus group consisting of the employees directly involve with the power plant. These are Manager, Superintendent, Operation Supervisor, Maintenance Supervisor and Electrical Engineer. This group has many
