Heidi forbes women in electricity networking event

Women in Electricity Networking Event Electricity Trading Risk Management Maturity and

Carbon Legislation Update

August 2013

Electricity Trading Risk Management Maturity

© 2013 Deloitte Touche Tohmatsu 3

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

?


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


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?


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


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?


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

Carbon Update


Two Different Parties with the Same Target 5% reduction by 2020

Australian Labor Party - mandatory

scheme

The Coalition - voluntary scheme


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


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?


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.


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

Contact us

Deloitte

Grosvenor Place

225 George Street

Sydney NSW 2000

PO Box N250 Grosvenor Place

Sydney NSW 1220 Australia

Tel: +61 (0) 2 9322 7000

Fax: +61 (2) 9322 7001

www.deloitte.com.au

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte's approximately 170,000 professionals are committed to becoming the standard of excellence

About Deloitte Australia

In Australia, the member firm is the Australian partnership of Deloitte Touche Tohmatsu. As one of Australia’s leading professional services firms, Deloitte Touche Tohmatsu and its affiliates provide audit, tax, consulting, and financial advisory services through approximately 5,400 people across the country. Focused on the creation of value and growth, and known as an employer of choice for innovative human resources programs, we are dedicated to helping our clients and our people excel. For more information, please visit Deloitte’s web site at www.deloitte.com.au.

Liability limited by a scheme approved under Professional Standards Legislation.

Member of Deloitte Touche Tohmatsu Limited

© 2013 Deloitte Touche Tohmatsu

General information only

This presentation contains general information only, and none of Deloitte Touche

Tohmatsu Limited, its member firms, or their related entities (collectively the

“Deloitte Network”) is, by means of this presentation , rendering professional advice

or services.

Before making any decision or taking any action that may affect your finances or

your business, you should consult a qualified professional adviser. No entity in the

Deloitte Network shall be responsible for any loss whatsoever sustained by any

person who relies on this presentation.

http://www.deloitte.com/au/about

http://www.deloitte.com/au/about

http://www.deloitte.com/dtt/home/

Heidi forbes women in electricity networking event

Business

portfolio

sophisticated

clean energy

business units

carbon pricing

spreadsheets

financial

limited middle