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Dealing with Uncertainties in Energy Investments

Uwe Deichmann's picture

 John Hogg/World Bank

According to the International Energy Agency (IEA), global energy demand is likely to grow by more than one-third between now and 2035. Mobilizing investment capital is one major task. Additionally, energy infrastructure such as electric power facilities has a long time span – up to 40 or 50 years in the case of base-load nuclear or coal plants. As the new Growing Green report, released by the World Bank’s Europe and Central Asia Region, points out, with such a long time span and the enormous amount of capital at stake, power sector investments need to consider at least three types of uncertainties—changing regulations, changing technology, and changing climatic conditions.

Regulatory Uncertainty

Regulatory uncertainty persists in countries without formal greenhouse gas emission restrictions. Even in the EU, the emissions trading system is still evolving and future prices for carbon emissions will in large part depend on political decisions. Such schemes may spread to other parts of Europe and Central Asia as the implications of climate change become more apparent and support for climate action rises. A price on carbon, either through a cap-and-trade sys¬tem or a tax, can profoundly alter the comparative economics of different power generation technologies. With a price on carbon emissions, the cost differential between fossil-fuel plants and low-carbon alternatives shrinks and in some cases disappears.

Many international firms and banks already incorporate an assumed carbon price into their financial investment feasibility calculations. Expectations of future carbon pricing have already altered investment decisions favoring natural gas over coal-fired power plants in the U.S. (although more recently the drop in gas prices has been a larger factor). Conversely, regulatory uncertainty also hinders investments in low-carbon generation. The IEA estimates (pdf) that uncertainty in climate change policy might add a risk premium of up to 40 percent to such investments, driving up consumer prices by 10 percent.

Boys and their Toys – Building Better Cities

Dan Hoornweg's picture

Niagra Falls, North America

Caution – this blog is almost as long as the soon-to-be commissioned Niagara Tunnel.

Often I can hide it – posing maybe as an economist, risk manager, a finance-guy, public-policy wonk; I’ve even once been complimented as an urban planner. But every now and then I revert to form and it slips out that I’m an engineer. This week was a classic – a ‘boy and his toys,’ my wife warned.

I went to Niagara Falls not to see the falls, or visit the casino, but to tour Ontario Power Generation’s (OPG) Niagara Tunnel and Adam Beck Hydroelectric Power Station! Well worth a ‘!’ as getting to visit these two big civil engineering works was a bit like Christmas coming early; and they provide important lessons.