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Uncertainty is a critical problem in the evaluation of energy projects, owing to the capital-intensive nature of most projects and the need for cost recovery over long time frames. Projecting the market and regulatory conditions over such long time frames is often fraught with error and, in hindsight, bad decisions. Two of the major sources of uncertainty facing energy projects are market uncertainty (market prices or price volatility are not known with certainty into the future) and regulatory uncertainty (relevant policy measures cannot be anticipated with perfect foresight). Since low-carbon energy projects in particular need policy support to achieve widespread market deployment, regulatory uncertainty in the form of a lack of climate-change policy or inconsistent application of subsidies and incentives can be especially difficult for investors in low-carbon energy technologies. Even if the future cannot be predicted perfectly, there are ways to incorporate uncertainty into project evaluation. Calculation of expected monetary values (EMV) is possible when all possible outcomes can be identified and probabilities assigned, but since the EMV represents the average payoff over a large number of trials, it may not be appropriate for single energy project evaluation. Sensitivity analysis and threshold analysis are ways of visualizing how the NPV or EMV of a project may change under different values of key parameters.
Reminder - Complete all of the Lesson 6 tasks!
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