Risk taking is normal to entrepreneurs, to lending and funding agencies and also to government while making development plans. Such risks and their extent can be reflected in choosing the discount rate of the project, where investors expect higher returns to compensate them for risk taking. Because of the regulatory nature of the industry, the limited number of players and the unique nature of electricity and its continuous rise in demand, the average project in the electricity supply industry (ESI) is less risky than the average investment in the stock exchange. However, each project has its own risk; projects that involve new technologies (renewable and clean-coal technologies), or projects with lengthy lead times (nuclear and hydro-power), involve a lot of investment and have more than the average level of risk. Some of the risks are related to engineering and technology; however, market risks equally exist. Recently, two other risk factors are affecting the ESI. The first relates to carbon pricing and legislation - discussed in more details in earlier chapters. Long-term investments in carbon-intensive generation like coal firing plants are highly vulnerable to variations in possible carbon pricing and trading as well as future legislation. Another risk factor is that provided by the wider investments in renewables, particularly wind and solar energy. These as already explained provide distribution to the operation of the generating system and its economics, thus providing another risk to the system investors. Both these two risk elements as well as many others are discussed in detail below.

Chapter Contents:

• 15.1 Introduction
• 15.2 Generation investment
• 15.2.1 Deterministic generation investment decisions
• 15.3 Project risks
• 15.4 Sensitivity analysis
• 15.5 Break-even point analysis
• 15.6 Decision analysis
• 15.7 Risk analysis (the Monte Carlo simulation)
• 15.8 Consideration in risk analysis
• 15.8.1 Building up probability distributions
• 15.8.2 Disaggregation
• 15.8.3 Correlation
• 15.8.4 Effect on the discount rate
• 15.9 The value of risk management in liberalised markets
• References

Inspec keywords: air pollution control; electricity supply industry; investment; legislation; pricing

Other keywords: nuclear projects; market risk; electricity supply industry; renewable technology; carbon-intensive generation; investment projects analysis; coal firing plants; long-term investments; legislation; ESI; hydro-power projects; clean-coal technology; carbon pricing

Subjects: Pollution detection and control; Power system management, operation and economics