PrintMarket Risk: "The possibility that an individual or other entity will experience losses due to facturs that affect the overall performance of investments" (Investopedia.com).
The factors that affect the overall market are things like demographics, the overall inflation and interest rates, and a very recent and obvious one: the COVID 19 pandemic. All investments are subject to these kinds of factors and our energy projects will certainly have their returns affected by these macroeconomic parameters. Some of these parameters can be mitigated or “hedged” while others may not be able to be covered. For instance, if a developer were worried about rising inflation causing his returns to erode in the upcoming years, they might decide to include an escalator in the price of the output of the project. A more subtle form of risk mitigation for long term projects is to borrow money (take on debt) at a fixed interest rate for the term of the loan. This will shield the project developer against the potentiality of an increase in interest rates that might be catastrophic for returns in the future. Of course, when the developer decided to do a deal for debt at a fixed interest rate, they also removed the potential upside of a decrease in interest rates in the future, which could cause returns to be significantly higher than expected.
Doing a deal that removes pricing volatility for a period of time and for a known quantity is what is known in the financial community as a fixed for float swap. We will see this again as we move through the commodity markets as well as markets for other inputs into our project.