An Uncertain Future

01 September 2006
Mike King and Dr. Michael Rosenzweig

In this article, published in the second issue of The World Energy Book from the World Energy Council, NERA Affiliated Consultant Mike King and Affiliated Industry Expert Dr. Michael Rosenzweig examine the various uncertainties confronted by potential North American power generators when making investment decisions. Mr. King and Dr. Rosenzweig note that, in addition to the commodity and regulatory risks that have been affecting the industry for years, North America is also facing uncertainty over environmental policy and the implications it will have for recapitalization of the generation sector. In addition, recent experience has highlighted the risks posed by the inherent unpredictability of fuel prices over the normal life time of generation assets, which increases the business risk of generation projects. While the authors acknowledge that the issues confronting the industry are challenging, especially in light of the greater levels of uncertainty, they offer a list of concrete steps that regulators, policymakers, and companies can take to minimize the cost and risk in future power supply choices. They summarize their views as:

Regulatory and policy stability and certainty in the rules of the game are core criteria in investment decisions. It is essential that the regulatory and policy framework is well developed, consistent, and predictable in order to remove risk (and cost) from the industry and from consumers. Whipsaw decisions, inconsistency, and ambiguity increase risk, increase cost, and decrease investment retarding the addition of future generation supply.
Companies should realize that their operating future is inherently unpredictable. Thus, companies must choose their supply options based on portfolios that are robust and can withstand the outcomes that are guaranteed to be different than those forecast by even the best prognosticators.
Finally, regulators, policymakers, producers, utilities and consumers will all benefit by re-embracing the development of robust and competitive markets for wholesale power. In conjunction with greater regulatory and policy certainty, trading provides tools to quantify future risk and to hedge its effects, thus reducing a primary investment disincentive.