Risk assessment

1
Risk assessment

• CAP131 Working Group (2)
• 27 October 2006

2
Content

• The assessment of stranding risk
• The allocation of stranding risk
• Conversion to years of the investment proxy i.e.
  X and Y

3
Why consider risk?

• Seeking to allocate risk of unnecessary
  investment between existing generators, new
  generators, and consumers
• Seeking to make user commitment commensurate with
  risk
• Risk needs to consider
• the impact of the event
• the probability of the event

4
Impact of an event

• The reduction of TEC of an existing generator or
  the termination of a new generator agreement
  would have the same impact, in terms of stranded
  asset capital cost per kW
• Analysis shows that a multiple of 12 times TNUoS
  tariff approximates to the capital investment
  cost and therefore the stranded asset capital
  cost
• as discussed, other proxies could be used

5
Probability of event

• Risk of an existing power station closure
• National Grid forecasts 2.3GW of the present 74GW
  of existing generation will close in the next PCR
  period
• Probability of closure 3
• Risk of a new generator project termination
• National Grid forecasts 12GW of new generation
  will connect in the next PCR period from a
  contracted background of 24GW
• Probability of termination 50

6
Risk Allocation

• If use 12 years Generation TNUoS as the total
  user commitment required from all parties and
  apply closure and termination probabilities, can
  develop scenarios
• For new generators
• Stranding risk Pn X Gen TNUoS
• For existing generators
• Stranding risk Pe Y Gen TNUoS
• For consumers
• Stranding risk Pn TNUoS (12-X) Pe
  TNUoS (12-Y)

7
Results
End Consumer
New Generator
Existing Generator
(50(12-X)TNUoS) (3(12-Y)TNUoS)
Risk
50XTNUoS
3YTNUoS
X12 Y12
94
6
0
X6 Y0
47
0
53
X6 Y2
1
47
52
8
Conclusions

• A combination of X6 and Y2 places 50 of the
  stranding risk with the end consumer