Energy Investment and Uncertainties Related to Climate Change

"The energy industry's decision-making process for energy investment is much more complicated today than it was before globalisation and liberalisation. The change can be explained simply by an environment which is more complex, full of uncertainties and unpredictable...With respect to climate change, the International Energy Agency (IEA) writes that 'uncertainties on greenhouse gas (GHG) emissions create uncertainties in the political responses to increased GHG concentration. Uncertainties in the economic impact of climate change create uncertainties in mitigation policy that will be put in place. All these uncertainties, combined with the uncertainties about the cost of abatement technologies, create considerable uncertainties in the financial implications to companies'...The current approach to investment decision in a risky environment is: risk segmentation, risk analysis and risk mitigation...Risks related to investment in the energy industry fall into four categories: economic risk, political risk, legal risk and force majeure...The rationale used for investment decision is still to maximise the expected discounted cash flow (its net present value NPV) but, as the IEA puts it elegantly: 'Investment was made if the discounted revenues exceeded the discounted costs. Now, investment is made, only if the discounted revenues exceed the discounted costs by a margin sufficient to overcome the value of waiting'." (Chevalier 2009, pp. 50 & 51)