CHAPTER 2 BACKGROUND INFORMATION AND THEORITICAL FOUNDATION

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1 CHAPTER 2 BACKGROUND INFORMATION AND THEORITICAL FOUNDATION Recently, the demand of electricity is increasing quite fast, where it can be seen from the Waktu Beban Puncak (WBP) that is high. The difference between the load at WBP and average load is wide. This means that there is inefficiency in using electric energy and producing electric energy, in terms of there is a lot of energy will be wasted in long period. PT.PLN must supply energy in big amount just to fulfill the demand at WBP. Other than that the rest of the energy will not be used. Due to that problem PT.PLN established a regulation called Daya Max Plus (DMP) to create efficient energy production. The expected effect of this regulation is minimizing the gap between the energy used at WBP and average load. Another problem faced by PT.PLN is the increasing demand of electricity from the community, but PT.PLN cannot meet the demand. One of the solutions to this problem is by building the new power plant to add production capacity. Nevertheless, PT.PLN has yet to choose the kind of energy that is will be used in the new power plants. 2.1 Risk Risk is the common word that is usually found everyday and connected with negative things. Taking risk in another point of view can also can be defined as to obtain benefits. It is more common known as speculative risk. Mamduh states, risk is divided into two categories. The first is pure risk which is the risk that where loss is possible and zero benefit possibility. Second is speculative risk that there is a loss possibility but there is also a benefit possibility. (Mamduh, 2006:7) In Kountur statements, speculative risk is one kind of risk which outcome can harm and also can give benefits. The benefit outcome is usually called as opportunity. (Kountur, 2006:10) 5

2 Similar to Mamduh and Kountur, Olsson argues that risk not only can be seen from the negative aspect, but risk can be described that there is a benefit that can be obtained from taking risk. (Olsson, 2002:5) From the definition of risk above, PT.PLN faces risk in fulfilling the electricity demand of the society. Because of increasing demand of electricity, PT.PLN set up a regulation called DMP. DMP enforces consumers, especially the industries, to reduce its electrical usage from 5 p.m. to 10 p.m. If one of the companies has successfully reduced the usage, then it will get an incentive in form of discounted electrical bill. Although it seems that PT.PLN will experience loss because of lesser income, the plan will actually work because it is what the company expects; which is reducing the gap between the produced energy and the energy used by its consumers. If the industry can not reduce its electrical usage in the given time, then the industry must pay twice as much as the normal payment. This will add profit for PT.PLN Risk Management Before stepping further into the risk management process, it s better to understand the about risk management. In Mamduh statement, risk appears everywhere, every time, and very hard to avoid. So risk should be managed to avoid from negative things that may happen. The aim of risk management is to manage risk so the company can survive, but sometimes many companies take risk because they see potential benefits behind the risk. (Mamduh, 2006: 10) 6

3 There are steps that should be done to manage risk. The process of management risk is to have better understand about the risk. Figure 2.1 The Risk Loop 1) Operational Risk Operational risk is the traditional type of risk, but less understood than other types of risk. In Crouhy statement, Operational risk is the risk associated with operating a business. Operational risk covers such a wide area that it is useful to subdivide operational risk into two components, operational failure risk and operational strategic risk (Crouhy, 2001:478) Operational Risk Operational Failure Risk (Internal operational risk) The risk encountered in the pursuit of particular strategy due to: - people - process - technology Operational Strategic Risk (External operational risk) The risk of choosing an inappropriate strategy in response to environmental factors, such as: - political - taxation - regulation - government - societal - competition Figure 2.2 Two Broad Categories of Operational Risk 2) 1) Source: Carl Olsson, Risk Management in Emerging Markets (2002, 17) 2) Source: Michel Crouhy, Risk Management (2001, 480) 7

4 2.1.3 Risk Matrix The first thing to do is to recognize the kind of problems that we are facing. There is one way that can help determining what action that should be chosen, by using a tool such as the probability / impact matrix that is set up by Carl Olsson. Figure 2.3 Probability / Impact Matrix 3) From the above figure, risk is categorized into four items. Each item shows which risk should be prioritized to minimize the possibility of risk in general. PROBABILITY High Low Put in place controls to minimize exposure Low No action required IMPACT Priority for action Put in place a contingency plan High 2.2 Electric Power Based on Encyclopedia Americana, Electric power is generated by converting heat, light, chemical energy, or mechanical energy to electrical energy. Most of electrical energy is produced in large power station by the conversion of mechanical energy or heat. (2005: 501) Electric power can be produced using other energy. It means that water, wind, light can be used to generate electric power and fossil fuels can be converted into heat and then converted again into electrical energy. Because of that, there are many kinds of power generator in producing electrical energy. In Indonesia there are PLTA (Pembangkit Listrik Tenaga Air), PLTU (Pembangkit Listrik Tenaga Uap), PLTG (Pembangkit Listrik Tenaga Gas), PLTGU (Pembangkit Listrik Tenaga Gas dan Uap), PLTP (Pembangkit Listrik Tenaga Panas bumi), and PLTD (Pembangkit Listrik Tenaga Diesel). The entire power generator has advantages and disadvantages. 3) Source: Carl Olsson, Risk Management in Emerging Markets (2002, 20) 8

5 2.2.1 Hydroelectric Power Plant PLTA is included in the hydroelectric power plant. Hydroelectric plant needs streaming water to drive the generator of the hydroelectric station. The electric power that can be produced is dependant on the volume of the water stream. This causes a disadvantage of hydroelectric power plant. Hydroelectric power plants has operation impediment that is the function of the reservoir. But only for special conditions, that is when the water used is not only for hydroelectric power plant but also for the uses of irrigation and flooded control. It means that the reservoir has a function to supply the water for the irrigation in dry season and it has function to control the height of reservoir to prevent floods in rainy season. Besides that, there is a factor that can reduce the operation impediment. There is no heating process in hydroelectric power plant, so there will be no temperature affected in part of producing electric power Steam-electric Power Plant PLTU is the steam-electric power plant. Steam-electric power plant used the same basic component of power plant. There is a broiler that functions as steam generator, a steam turbine to convert the kinetic energy of steam to mechanical energy, and the last one is generator as the component to convert mechanical energy into electricity. The advantage of steam-electric power plant is that it can produce more than one thousand megawatts of power. Dominantly this power plant is excellent as operational techniques and from the operational expenses. The operational impediment that might happen like the starting time takes hours and the change of power per time is limited. There is also temperature problem; it means that some of the power plant s components will confront the expansion and contraction that should be controlled to prevent from the damage of the components itself Internal Combustion-Engine Power Plant PLTD and PLTG act as the internal combustion-engine power plants. The internal combustion-engine power plant generates electricity from diesel engines and gas turbines. The consumption of fuels is quite high, it makes this power plant is more expensive rather than steam-electric 9

6 power plant. Internal combustion-engine power plant s process can be started within minutes. Commonly PLTD and PLTG are used in WBP when the demand is increasing. PLTG has more disadvantages not only the fuels expenses is higher than PLTD, but PLTG machines also could be rapidly exhausted if it is frequently started and stopped. Therefore, internal combustion-engine power plant ideally suites for situation where extra power is needed especially in WBP. 2.3 Demand Management Demand management will gather information that is related with forecasting. In Gaspersz statement, demand management is a management function from the product demand to guarantee that the master scheduler understands and realizes about the product demand. (Gaspersz, 2005:71) The action in demand management can be divided into two main actions. The first one is order service and the second one is forecasting Forecasting The forecasting action deals with uncertainty. In Gaspersz statement, forecasting has a business function to predict the use of product, so the product can be produce in the precise quantity. Sometimes, the variables to forecast are usually based on time series historical data. (Gaspersz, 2005:71) Levine argues that business forecasting is one technique that can support the planning for the future needs, because the aims of forecasting is to make prediction of future events then can be integrated with the planning of the business. (Levine, 2004:566) Relating to PT.PLN case, PT.PLN should predict the demand of electrical energy because PT.PLN has limited capacity to produce electrical energy and is responsible to fulfill the demand. PT.PLN has a critical problem especially in WBP when the electrical energy demand increases dramatically. 10

7 About the accuracy of the forecasting, Gaspersz has opinion that with the assumption that each factor is constant, the further forecasting is conducted, the result of the forecasting will be less accurate. The forecasting for long-period is usually for long-period projects, capital investment, and business plan. (Gaspersz, 2005:75) Types of Forecasting Methods Qualitative Forecasting Methods Quantitative Forecasting Methods Factor Listing Method Expert Opinion Delphi Technique Time Series Moving Average Exponential Smoothing Causal Regression Analysis Multiple Regression Trend Projetion Figure 2.4 Forecasting Model 4) Qualitative Forecasting Method Levine state that qualitative forecasting method will be applied to forecast when the historical data are unavailable and considered based on subjective and judgmental. (Levine, 2004: 567) In Render statement, qualitative forecasting model is especially useful when the historical data is unavailable or when the accurate quantitative data is difficult to obtain, and when the subjective aspect is expected to be more important. (Render, 1991: 98) Based on the definition of qualitative forecasting model above, it will be made if the past data does not exist. This forecast needs very high-level deliberation to give the best result in predicting the future. This forecasting also has several methods such as factor listing method, expert opinion and the Delphi technique that can be used to predict. 4) Source: Vincent Gaspersz, Production Planning and Inventory Control (2005, 85) David Levine, Business Statistic (2003, 615), Render, Quantitative Analysis for Management (1991, 97) 11

8 Quantitative Forecasting Method Levine argues that quantitative forecasting method uses historical data to make prediction, where the past data will be studied to have more understanding of the underlying structure of the data. (Levine, 2004: 567) Quantitative forecasting model can be divided into two types of method; time-series forecasting method and causal forecasting method. The timeseries forecasting method uses the past and the present data to be processed in the prediction result. The data used is numerical data and its independent variable is time. In causal forecasting method, there is determination factors related to the predicted variable. (Levine, 2004: 267) 2.4 Statistics Theory Statistic is the branch of mathematics that examines ways to process and analyze data. Statistics provides procedures to collects and transforms data in ways that are useful to business decision makers. (Levine, 2006: 2) Before the statistics are known, it would be better if the definition of variables, populations, samples, parameter and statistic are understood. The variables are characteristics of items; population is the members of a group that choose to represent the conclusion of a case; parameter is numerical measurement that can represent the population s characteristics; statistics is numerical measurement that can describe the sample s characteristics. (Levine, 2006: 3) Hypothesis Testing Methodology Hypothesis testing typically begins with some theory, claim, or asserting about a particular parameter of a population. (Levine, 200?: 282) In the hypothesis testing, there are two kinds of hypothesis; null hypothesis and alternative hypothesis. Null hypothesis is the hypothesis that is always tested, because the population parameter is equal to the company classification. The symbol for null hypothesis is H 0. Alternative hypothesis represents the conclusion if the null hypothesis is rejected. The null hypothesis is rejected if there is adequate evidence to decide that 12

9 the null hypothesis is false. The symbol for alternative hypothesis is H 1. Levine states that alternative hypothesis is the opposite of null hypothesis. (Levine, 2003: 283) The Rejection and Non-rejection Region. In the test statistics, the sampling distribution is divided into two regions; rejection region and non-rejection region. In the rejection region, the value of the test statistic is likely to be occurring if the null hypothesis is false, and so it will be rejected. It happens because there is sufficient evidence to reject the null hypothesis. In the non-rejection region, the null hypothesis cannot be rejected, because there is insufficient evidence to reject. (Levine, 2003: 284) The Risk in Decision Making In the hypothesis testing methodology, there are two types of error that might happen. There first one is type I error which occurs if the null hypothesis is rejected; where as in fact the null hypothesis is true. The probability of a type I error occurring is called. The level of significance is specified before the hypothesis test is presented, so risk level of type I error can be selected. The selection of will determine the size of the rejection and non-rejection region. The probability that the null hypothesis is rejected and in fact it is not rejected is called confidence coefficient ( 1 ). The last one is type II error which occurs if the null hypothesis is not rejected; where as in fact the null hypothesis is false. The probability of a type II error occurring is called. The occurrence of depends on the difference between the calculated and actual value of the population parameter. The probability of error type II will be small if the difference between the hypothesized and actual value of the parameter is large and so the opposite. The probability of type II error is called the power of a statistical test ( 1 ). (Levine, 2003: 285) 13

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