The purpose of the risk response register is to manage or mitigate the possible risk events. The response register calculates the effectiveness of responding to a risk event and the overall change in the financial and schedule goals. Multiple parts to this phase of risk management exist and they are covered in turn.
5.7.1 Risk Criticality
The risk criticality output utilises the risk impact likelihood and severity input given for each risk in the risk register (Section 5.6.2). Each likelihood and severity input is given a value, as shown in Table 5.8.
Table 5.8 – Risk likelihood and severity matrix
Severity Linguistic
label
Very Low
Low Moderate High Very
High Critical Score 1 2 4 6 8 10 Li ke lih o o d Very Low 1 2 3 5 7 9 11 Low 2 3 4 6 8 10 12 Moderate 3 4 5 7 9 11 13 High 4 5 6 8 10 12 14 Very High 5 6 7 9 11 13 15 Certain 6 7 8 10 12 14 16
An individual risk’s criticality is given as a rank within the total number of risks and colour coded to express the overall impact of the risk in impeding the project’s objectives. The colour coding of risk impact levels is similar to the existing research [56] covered in Section 3.3. Within the table, the severity scale scores more highly than the likelihood scale as the severity of a risk has a greater effect on impeding the project’s objectives. This is similar to the risk severity matrices of IEA-RETD [56]. If there are two or more risk events of the same score they would get the same number i.e. two risks with certain likelihood and critical severity would both score a rank of 1 and the next risk in descending order would score a rank of 2.
5.7.2 Response Strategy
The response strategy is not only a key component to risk management but also closely reviewed by potential lenders to assess a sponsor’s ability to effectively manage the project [63]. Four possible risk response actions or strategies were possible within the DSS and these are as defined in previous work [46, 56, 212]:
- Reduce
Take action to reduce the impact of the risk event. An example of this would be to implement a control process or procedure.
- Retain
Tolerate or accept the risk event. This response is usually sufficient for low likelihood and severity risks.
Transfer the risk event to another party. An example of this would be to pass the risk event to another stakeholder or have it insured.
- Avoid
Avoid the risk event. This response is reserved for critical risks with very high likelihood and severity. An example of this would be to change a process to completely avoid the risk event or, failing that, abandon the project.
Risk mitigation actions are applied in the IEA-RETD [56] model to respond to risk events but are not defined in this structured manner. A risk response consists of an action that has a level of effectiveness and a cost to the project. Similarly, the response cost can be any one of the effect variables in Table 5.7 and mutual exclusivity is maintained between risk responses.
5.7.3 Response Cost: Benefit Analysis
Cost: benefit analysis is commonly applied in project risk management [52, 154, 213] and has been applied within the research for assessing risk response strategies within bioenergy projects. There are two outputs for the cost: benefit analysis of the risk response strategy or strategies. The first output calculates the effect of each selected risk response on the final minimum levelised cost of electricity. This could be a decrease in the LCOE if the response action is beneficial to not having a risk response action for the selected risk or an increase if opposite is true. The second output calculates the effect of each selected risk response on the project duration. If the risk event or the cost of the risk response affects a project task then the output shows a decrease or increase in the overall project duration. The pseudo-code algorithm for the cost: benefit calculations is as follows:
1. CALCULATE (without response)
Run the residual risk scenario31 without the risk response for that particular risk a. Project LCOE ( )
b. Project Duration ( )
2. CALCULATE (for each response strategy)
Run the residual risk scenario with each risk response action benefit and cost accounted for Project LCOE ( ) GO TO Step 3 Project Duration ( ) GO TO Step 4
31
3. CALCULATE LCOE Change ( )
For each α-cut
=
Next
̅̅̅̅̅̅̅̅ ∑
4. CALCULATE Duration Change ( ) =
5. END
The algorithm essentially calculates the LCOE (Section 5.9) with the risk occurring but no response and then with each risk response applied at each α-cut to determine approximately the fuzzy change. This also applies to the project duration (Section 5.11.2) without a response and with a risk response . A positive mean LCOE change ( ̅̅̅̅̅̅̅̅ ) implies that the risk response
strategy effectiveness or benefit does not justify the cost of responding. Whereas, a negative
̅̅̅̅̅̅̅̅ implies that the risk response strategy effectiveness or benefit does warrant the cost of responding and would reduce the project LCOE. If multiple possible risk responses are available then the greater the reduction in levelised unit cost the more effective the response. However, the decision-maker would have to assess the best strategy given the trade-off between time and cost goals if a risk event or response affects both the levelised unit cost and project duration. Given graphically as outputs within the DSS, it is necessary for the decision-maker to select an optimal risk response. In cases where there are many risks with responses and limited resources for the project to respond to risk, there is the option to select ‘undecided’ within the model and use the actions output optimisation method, as covered in Section 5.12.
5.8
DSS Scenarios
Three scenarios exist within the DSS to give the decision-maker greater control throughout the project analysis process and these are defined as the initial, inherent, and residual scenarios. The initial scenario calculates the project financial and schedule outputs without the effect and cost of any risk events or any responses. Therefore, it shows the project in its original form without any risk exposure, and represents the ‘base case’ or initial version of the project. Whereas, the inherent scenario includes the risk event effects, with all risks occurring to their fuzzy degree, in the project output calculations but not the benefit and cost of any risk response(s). Finally, the residual scenario is the same as the inherent scenario in determining the possible total exposure to risk but also
calculates the benefit and cost of the chosen risk response strategies. The initial scenario is utilised throughout the case study analysis of Chapter 6.