Big power investment decisions demand more than a wing, a prayer and a consultant’s report
Twan Vollebregt, CEO of Energy Fundamentals, investigates the current perils and pitfalls of investing in renewables...
For anyone who has to make major investment decisions about power generation in Europe, we live in difficult times.
What use are ten year forward curves when Germany decides to abandon nuclear power overnight? How can you make sensible capital investment decisions with a partial Euro collapse still a distinct possibility? How do you factor into your risk management an expectation of power demand growth nudging two per cent across Europe that suddenly became a five per cent contraction?
There is also the changing balance between renewable and traditional power plant investment. People have started to speculate on the dangers of a growing dependency on the intermittent renewable energy. Leaving aside the potential problems of providing the necessary back up, what if demand forecasts rise again, and reignite the call for investment in traditional power plants?
Naturally, some decisions, like buying and selling capacity, can be made on the basis of a relatively short market forward curve. But anything requiring long-term fundamental views, such as M&A activity, plant development or building an interconnector, is dependent on constant ‘what if' scenario analysis and modelling right up to the moment of the decision.
Consultants are important in the process. You give them the brief, they find the appropriate data, run their own esoteric models and present their risk analysis and advice. But a report is of limited value if the investment decision process is anything longer than the very short term, and that leaves decision makers with two options, neither ideal. They can reengage consultants later in the planning cycle to update their scenarios, though that report too will date.