Electricity is versatile, clean to use, easy to distribute and supreme to control. Just as important, it is now established that electricity has better productivity in many applications than most other energy forms. All this led to the wider utilisation of electricity and its replacement of other forms of energy in many uses. Demand for electricity is now growing globally at a rate higher than that of economic growth and, in many countries, at almost 1.5-2 times that of demand for primary energy sources. With the type of technologies and applications that already exist, there is nothing to stop electricity's advancement and it assuming a higher share of the energy market. Saturation of electricity use is not yet in sight, even in advanced economies where electricity production claims more than half of the primary energy use. Other than for the transport sector, electricity can satisfy most human energy requirements. It is expected that, by the middle of the 21st century, almost 70 per cent of energy needs in some industrialised countries will be satisfied by electricity.

Projects in the electricity supply industry live for a long time. As already mentioned, 25-30 years is a normal useful life for a conventional power station. The network lives even longer. For power generation projects most expenditures, in the form of operational cost (fuel, etc.) and income occur after commissioning. Such future financial flows will occur during different times and circumstances. Correspondingly, these will have different value of money than flows occurring during project evaluation. Therefore, the time value of money (discounting) and the choice of a proper discount rate is highly important for capital intensive long-life projects with large operational cost, like those of the electricity supply industry.

During the life of the project, there will be two financial streams: one is the cost stream and the other is the benefits (income) stream. The two streams must contain all costs and benefits for the same estimated life frame of the project. In financial evaluation of small projects, the two streams will contain only the estimated actual cash costs and benefits of the project through its life cycle. The economical evaluation will influence the two streams, to include all the economic (social and environmental) costs and benefits of the project that can be evaluated. The difference between the two streams is the cash flow, the net benefits stream. The values of the net benefits can be negative, particularly during construction and the early years of the project. In later years, the benefits will usually exceed costs and the discounted net benefits will be positive, otherwise the project will not be undertaken.

The ultimate purpose of the analysis would be to provide a measure of the impact of the project on the national welfare as exemplified by increased consumption of goods and services (including electrical energy) that serve as a proxy to increased welfare.

External factors, most importantly, the need to pursue the goals of sustainable development, have had a growing influence on the future of the ESI. International agreements like the Kyoto Protocol and the anxiety of governments to ensure energy security are modifying the way the business of electrical power is being conducted. For the longer term, the review recognises the level of uncertainty involved in trying to predict too far into the future. Given that there is a strong chance that there will be even more stringent carbon-reduction targets post-2012, the review recommends retaining maximum flexibility by creating and keeping open all low-carbon energy options. These options include renewable electricity generation, small-scale combined heat and power (CHP), nuclear power and clean coal.

One of the most significant features of the electricity supply industry in recent years has been the emergence of electricity trading in liberalised electricity markets; this also fostered risk management practices. Such activities, particularly risk management, are unimportant in regulated markets with fixed prices; it is only in liberalised markets where prices are charged in accordance with supply and demand and future expectations with possible price volatility that such activities flourish. This is enhanced by the introduction of customer choice. Such features manifest themselves to a varying degree in various liberalised markets; however, they are prominent in the US where prospects for electricity price volatility exist, owing to supply and delivery restrictions, more than in the UK and Europe where there are abundant reserve margins and strong interconnected transmission networks. Market players include generators producing electricity, suppliers who buy electricity to sell on to groups of consumers, traders and marketers who do not own generating assets but have active roles in the market place, and other players who provide, for example, risk management, hedging and brokerage.

From a practical point of view there is no project without risks. Risk taking is normal to entrepreneurs, to lending and funding agencies and also in government develop ment plans. Such risks and their extent are 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 aver age project in the electricity supply industry is less risky than the average investment in the stock exchange.

This is a real-life example of a detailed analysis for the least-cost choice of a transformer. It shows how the higher price of a facility can be traded against its operational cost over its life span. The example considers two offers for transformers. The first transformer offer is cheaper but it has higher losses, and slightly different payment conditions. The evaluation considers the overall cost of each alternative, its cash price plus its discounted cost of losses.