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Value at Risk Method for Asset Management of Power Transmission Systems

Conference Paper · August 2007

DOI: 10.1109/PCT.2007.4538282 · Source: IEEE Xplore

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 1
Value at Risk Method for Asset Management of
Power Transmission Systems
Andrej Schreiner, Gerd Balzer

numbers for outage probability and consequences. Having

Abstract— The value at risk (VaR) is a popular method in finan-
cial world. VaR measures the worst expected loss over a given
horizon under normal market conditions at a given confidence
level. This procedure summarizes objectively the exposure to
market risk and the probability of adverse move. So VaR meas-
urement can be applied as benchmark of different portfolio, as
control instrument for asset owners and as regulation instru-
ment for asset management. The simplicity and objectivity of
VaR concludes to the idea, to apply this method for power sys-
tems risk management. Basing on the simple example concern-
ing transmission network, a VaR derivation model for power
transmission and distribution systems is presented. The discus-
sion concerning advantages of this model in relationship to the
conventional reliability methods is closing the paper.
I. NOMENCLATURE
VaR: value at risk
C: Cost function
N( ): normal distribution
E(X): expectation of X
V(X): Variance of X
CV(X,Y): covariance between X and Y
Q: quantile of distribution
: mean value
: standard deviation
: confidence level
outage costs derivation completed, they are next being com-
pared with considered network maintenance expenditures.
Afterwards, one can decide whether the expenditure should
be invested into maintenance or not. In conventional reliabil-
ity derivation methods, the mean values are used for risk fac-
tors assessment. The main drawback of these methods is that
the stochastic distribution of factors is fully implemented and
therefore the risk can be under- or overestimated. Figure 1
shows three normal distribution curves of factors with the
same mean values but different variances. Apparently the
solid line is associated with more risk as the doted line be-
cause the variance of solid line is bigger. The intention here
is to find out the possibility to assess risk in respect to mean
values and the distribution curve of the factors. In this man-
ner, the utilities are able to estimate more exactly the risk in
values of appropriated currency and in consideration of indi-
vidual risk factors. Further benefit of VaR lies in the imposi-
tion of a structured methodology for critically thinking about
risk [2].

II. INTRODUCTION
Risk assessment is important part of asset management
process for power systems. The task of risk management is
identification, quantification and control of risks. In other
words, the ultimate goal of risk management is generally to
find an optimum between the height of the investments and
the reliable supply of all load points [1]. The quality of risk
measurement has significant impact on the costs of transmis-
Figure 1: Three distribution curves with the same mean
sion and therefore the ability to compete in global markets.
values and different variance values.
On the one hand, the amount of delivered energy on the load
points can be very well estimated. For this, the consumption III. VALUE AT RISK IN POWER TRANSMISSION AND
behavior of load points must be taken into account. On the DISTRIBUTION SYSTEMS.
other hand, the outages are equipment condition dependant
The approach introduced here is a method of portfolio risk
and the probabilistic derivation methods have to be applied in
estimation based on the portfolio theory. VaR is defined as
order to estimate them. Performing outage consequences deri-
follows: “VaR summarizes the expected maximum loss (or
vation process, many different factors must be considered.
worst loss) over a target horizon within a given confidence
These include profits losses, maintenance costs, image loss, interval” [2]. The intention is to assess the highest loss of
damage compensations etc. Each factor can be differently outage in a period of time with an appropriated confidence
weighted in dependency on the importance for given situa- level. In order to VaR derivation it is necessary to quantify
tion. In general term, the risk is defined as a product of occur- the horizon T and the confidence level C. Visually VaR is a
rence probability of outage and resulted costs. The both men- quantile of density function shown in Figure 2. Numerically
tioned risk components underlay the stochastic processes. the derivation of VaR is given as follows: at a specified confi-
The main challenge of risk derivation is to find adequate

dence level C, the worst possible realization Q is to be found,
such that the probability of exceeding this value is C.
∞ tion concerning equipment condition, importance as well as
C = ∫ f ( w ) dw
Q
where: C is the probability that the f(w) is equal or greater
than Q.
Figure 2: VaR as quartile of normal density function.
Precondition for computation of VaR is the definition of fi-
nancial value of a portfolio. Portfolio value summarizes from
investments in different financial assets (stocks, derivatives,
options etc.). The difference between purchasing price and
disposal price is the exposure to financial risk of an asset. The
sum of differences of all assets prices in the given period of
time is a result of various sources of financial risks and gives
the performance of portfolio. The sources of financial risk are
called risk factors. Normally the VaR measuring follows a
common general schema. It consists of three steps:
• Mapping Procedure
• Inference Procedure
• Transformation Procedure
In literature [3] a schematic showing how VaR measuring
works can be found. The general procedure scheme is shown
in Figure 3.
Figure 3: Schematic of how VaR Measure work [3].
2
For practical application of VaR concept in power systems
asset management, the modification of this process is needed.
A proper VaR metric derivation requires additional informa-
net structure information. Further more, the information
about equipment specific risk factors like maintenance cost,
enterprise specific risk factors (image or failure response
time), customer specific risk factors (power consumption and
criticality of supply) as well as sociological factors concerning
ecological damages by outage or economical consequences of
the latter have to be considered. Complete model of VaR
computation in power systems is depicted in figure 4.
Figure 4: Computation of VaR in asset management of
power systems.
A. Mapping Procedure
For application of VaR concept in asset management a
simple net structure is considered. The net consists of five
elements: a power supply, a load node, a cable and two lines.
The power supply and load node are assumed failure free and
therefore are not affecting the reliability of the system. The
task is to find total VaR as well as to analyze the influence of
all risk factors on the former.
Figure 5: Simplified transmission net
This structure is very simplified and makes up just for the
development of rough VaR model. For VaR concept applica-
tion the portfolio value must be defined. The portfolio value
assembles from revenues of energy sales on the load point and
cash values of equipment (assets) connecting this load point.
Through the outages the costs increase. These costs reduce
the value of portfolio. If the value of network portfolio over a
period of time is assumed to be constant so the affecting risks
lie in the costs of outages and loss of profits by outages.
 3

First of all the factors affecting the value of portfolio and If the assumption can be met - the energy price and middle
therefore the risk are to be found. Application of mapping power output in considered time period are constant, so the
procedure accepts a portfolio composition as an input. Its out- complete equation for derivation of portfolio can be written as
put is a portfolio mapping function that builds up the vector follows:
R of risk factors on the portfolio risk value Prisk. E ( Prisk ) = ∑ E ( H B )[ E (ks ) + E (kr )]
(5)
Prisk = (R)
+ PW ⋅ E (CAIDI ) ⋅ E ( H S )[ PR + E ( S )]
The following risk factors influencing the risk of outages are With: E(X) expectation value of factor X.
defined:
• Outage(s) costs CD Because all expectation values underlie a stochastic process,
• Loss of profit by outages L one has to characterize these stochastic properties. This is the
Outage(s) costs include the costs of faulted equipment, liabil- subject of next procedure.
ity costs due to third party damages, possible damages of fur- B. Inference procedure
ther components, failure rate of equipment,. Mathematical The purpose of an inference procedure is to characterize
formulation of the outage costs is: the stochastic distribution function of each risk factor basing
on information available at time 0. The risk factors are not
CD = ∑ H (k + k )
Equipment
B s r
(1) constant over the given time period because there are subjects
of different stochastic processes. The task of inference proce-
With: dure is to find out the distribution function of the factors us-
HB failure rate of equipment. ing experience based on information from the past or knowl-
ks mean value of liability costs due to third edge of assets experts. In Table 1 the risk factors are summa-
party and damages of further compo- rized and assumptions of distribution functions are met.
nents by outage of equipment. Risk factors R Assumption about stochastic
kr mean value of maintenance costs for distribution functions of R on
equipment. T=0
HB (cable C1) exponential distributed
Lost of profit by outages results from multiplication of en- HB (overhead line L1) exponential distributed
ergy price with the non-delivered energy, compensation pay-
HB (overhead line L2) exponential distributed
ments of loss suffered on the customers.
ks (cable C1) normal distributed
ks (overhead line L1) normal distributed
L = PR ⋅ PW ⋅ CAIDI ⋅ H S + S ⋅ CAIDI ⋅ PW ⋅ H S (2)
ks (overhead line L2) normal distributed
kr (cable C1) normal distributed
With: kr (overhead line L1) normal distributed
HS frequency of load point outages kr (overhead line L2) normal distributed
PR energy price in Euro pro kWh HS exponential distributed
PW average of power output in kW
S normal distributed
CAIDI customer average interruption dura-
CAIDI exponential distributed
tion index
Table 1: Assumption about distribution functions of risk
S mean value of compensation pay-
factors.
ments in Euro pro kWh
Remarkable is the small amount of risk factors in our exam-
ple. For the further research the inclusion of such factors such
The aggregation of mapping function as portfolio value:
as height of the current expenditures for maintenance is sup-
posable. Further more, the assumption of stochastic distribu-
Portfolio value = sales revenue + cash value of equipment -
tions must be justified in further research. Because of the
outage costs CD - loss of profits L (3)
multiplicative composition of risk factors, the simplest way to
derive this function is Monte-Carlo simulation. In Figure 4
The mathematical formulation of risk is then:
the risk factors maintenance costs of equipments are gener-
ated with mean value µkr and variance kr by random number
E(Prisk) = E(CD)+E(L) (4)
generator. The X-axis presents 15 of 100 simulated factors
(krL1-green, krL2-blue, krC1-red). The Y-axis presents the val-
With:
ues of the simulated costs. The random numbers are normal
E(CD) expectation value of outage costs in
distributed and stochastically independent. Because of the
time period T.
assumption of the dependency from each other (in case of
E(L) expectation value of lost of profits in
failure of cable C1, maintenance costs on the overhead line
time period T.
L2 occur also) the numbers should be transformed in common
 4

distributed variable using Choleski factorization. The same

procedure is applied to other risk factors.
IV. NET ANALYSIS
For risk control different VaR tools can be provided. The ba-
sic is the deeper analysis of VaR and conclusion of statements
like which of the risk factors influences the portfolio risk
more significantly or which confidence level is efficient for
the given network etc. In the following some of these tools are
presented. The values resulted from the application of these
tools onto the considered network are shown in Figure 4.

A. Analysis of confidence level

Analysis of confidence level provides the possibility to fix
the risk affinity level of an asset manager for appointed net.
Figure 7 shows that a higher confidence level is associated
with a higher VaR. By application of VaR for derivation of
hedging capital the confidence level must be carefully ana-
lyzed. The level of hedging capital should be fixed in depend-
Figure 6: Simulation of 100 factors for maintenance costs ency with criticality of the net or present value of equipment.
for krL1(green), krL2(blue), krC1(red).
C. Transformation Procedure
The transformation procedure combines the output of map-
ping function and the output of inference function for the cal-
culation of the desired VaR metric. The simulated data of risk
factors are used in equations 1 and 2 and the portfolio risk
equation 5 can be now derived. The results of portfolio risk
simulation are shown in Figure 6. The diagram shows that
costs of risks in 95% of the occurrences can be bigger or
smaller than expected value. But the largest costs do not ex-
ceed 16 times the expected value with confidence level of
95%. However the difference between expected value and
value at risk is not to disregard. This conclusion can be help-
ful for asset managers to assess the risk of considered network
and for meeting the decision of to maintain the equipments of
Figure 8: Analysis of changes in VaR by VaRiation of con-
the network or not. The next part of this article describes on
fidence level.
which manner the VaR measure can be helpful to control risk
if the decision of the maintenance is met. B. Marginal VaR
Marginal VaR can be used for variety of risk management
purposes. It points the change in portfolio risk resulted from
changes of a unit of a certain risk factor. Suppose an asset
manager wants to lower the failure risk on a load point. He
has to analyze all marginal variations of risk factors and to
pick the risk position with the largest VaR, since it will
have the greatest hedging effect.
∂VAR
∆VARi = (5)
∂E ( X i )
E(Xi) = expectation value of factor i.

C. Component VaR
In order to manage risk, it would be extremely useful to
have a risk decomposition of the risk factors. Component
VaR is a partition of the portfolio risk that indicates how
much the portfolio risk would approximately change if the
Figure 7: Simulated portfolio risk costs with expectation
given component is deleted.
value (black) und confidence level 95% (green range).

ComponentV aR = ( ∆VARi ) × E ( X i ) (6)
Component VaRs precisely add up to the total portfolio VaR:
VAR = ∑ CVAR i
(7)
i [3] < http://www.riskglossary.com/link/VaR_measure.htm >
i is equal to the amount of risk factors included in derivation
of VaR. In Figure 8 the VaR decomposition of the network is
depicted. The VaR is composed of two components: costs of
equipment failures by VaR outages, loss of profit by VaR out-
ages. For more detailed analysis the component VaR’s can be
further decomposed in costs for maintenance kr for L1, L2
and C1, in liability costs etc. So the estimation can be given
of the total portfolio risk reduction if a certain risks factors
become eliminated.
Figure 9: Component VaR analysis.
In summary it could be said that VaR measurement is very
useful tool for objectively derivation and analysis of risk com-
ponents of a network or a certain part of network.
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V. REFERENCES
[1] Balzer, G.; Schorn, C.: Risk assessment of high voltage
equipment. CEPSI 2004, Shanghai, 102, M3.
[2] Jorion, P.: Value at Risk: The New Benchmark for Con-
trollung Market Risk. Chicago 1997.
02.07.2006
VI. BIOGRAPHIES
Andrej Schreiner received his Dipl.-Wirtsch.-Ing.
degree in Business Administration and Electrical
Engineering in 2005 from Darmstadt, Univ. of Tech-
nology, Germany. He is currently doing his PhD thesis
at Darmstadt, Univ. of Technology, Institute of
Electrical Power Systems in the area of maintenance
strategies for transmission systems. His research interests
are in the area of risk assessment, RCM, asset
management and reliability analysis.
Gerd Balzer received the Dr.-Ing. degree in 1977 from
Darmstadt Univ. of Technology, Germany. He was the
Employee of BBC/ABB and the Head of the Department
of Electrical Consultancy for 17 years. He joined the
Darmstadt Univ. of Technology in 1994 and got a full
professorship in the Department of Electrical
Engineering and Information Technology. His main
research interests include asset management and network
planning. He is the Head of the Institute of Electric
Power Systems, a senior consultant of ABB and the Chairman of the IEC Work-
ing Group "Short circuit calculations". He is member of the VDE and CIGRE.