Once upon a time the people who managed the electric grid had to choose technology that was robust and adequate to meet a reasonable range of forecasts, and full-scale risk management strategies followed, treated largely as a matter for the attention of financial professionals. Not only is that comfortable approach a part of distant history now, but according to the IESO, managing the risk of supply or demand diverging from expected levels has become the single top priority. How did this happen, and what does it tell us about how grid managers and market participants will operate in the future?
Of course, risk management has always been a consideration. In any capital intensive business one has to prepare for a wide range of long term possibilities. What’s new is that the grid operator at least, and quite likely others as well, are seeing increasing volatility and uncertainty in short and medium term conditions, which causes them to think about risk management on a much more frequent basis, even as a basic criterion for pre-qualifying new supply or grid investments.
Despite the presence of a long term energy plan, and the development of several other layers of planning systems in Ontario, seasoned experts expect to see increasing levels of volatility and change in the next business cycle. Speaking of nuclear refurbishments and other major system investments, Kim Warren of the IESO said recently that, “we believe it will be necessary to have a form of insurance we can rely on should the schedule for this work not go quite as planned or should there be variations in other planning assumptions. This is the number one item on my radar, not SBG.” See “IESO sees era of increased volatility,” page 6.
Forecasting is undoubtedly getting better. But that may not be enough help if real world conditions are going off forecast by greater margins and more frequently than before.
Even with changes like this, quite likely the process of planning will be made up of the same major elements as always. There will be forecasts, option development, sensitivity analyses, risk assessments, and contingency planning. However, they will be organized differently. A greater amount of early-stage costs will be concentrated in providing for eventualities. This could increase capital costs in the system without much visible benefit to users of the system. With this in mind, planners will seek to become more adept at assessing the relative benefits of various options for risk management. You might call it the risk management of risk management. It may sound a bit wonky, but somebody’s got to do it.
Whereas in the past capital planning came first and risk assessment was applied to it, tomorrow’s framework could be different. Capital plans could be conceived by starting with the latest assessment of which investments are best suited to a risk management framework. What if load doesn’t materialize? What if peaks start spiking higher than ever while base levels decline? What systems are best fortified against extreme weather, or something else we can’t identify today, and which are most resilient under a variety of conceivable conditions? Where are competing companies likely to put their money to stay current with the evolution of smart grid technology? Planning for capital and planning for effective operations will both be quite different if the top priority is risk management.
Kudos to the IESO for seeing the future and warning everyone to get ready. Risk management has become a way of life. It doesn’t look like there will be any turning back.
— Jake Brooks