17 - Conclusions
Published online by Cambridge University Press: 05 June 2014
Summary
Energy markets exist to provide efficient mechanisms for balancing supply and demand intertemporally and geographically. This is accomplished through price signals, with transparency and effectiveness depending on the nature of the market. Regardless of market construct, the resulting price risk is always present. Someone must shoulder the burden of price and volumetric risk or else make investments in infrastructure to mitigate it.
In fully regulated markets, rates of return for investments and operations are set by regulatory bodies, and it is usually consumers who are, often unknowingly, on the receiving end of the gamut of risks and the costs to mitigate them. Some would argue that in regulated markets, risk management and commercial strategy tend to be of dubious value because decision makers are typically not directly bearing the financial consequences of their actions. Contrast, for example, the nuclear build in the 1970s with recent strategic assessments of the viability of new nuclear generators. In the case of the former, promises of electricity that would be “too cheap to meter” were followed by billions of dollars of cost overruns, shouldered in large part by rate increases to the consumer. In the latter case, potential investors in new nuclear generation have consistently exhibited remarkable trepidation regarding such investments; the prospect of being responsible for a bad $10 billion investment has a way of directing objective analysis to the economic prospects and risks associated with such projects.
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- Valuation and Risk Management in Energy Markets , pp. 432 - 444Publisher: Cambridge University PressPrint publication year: 2014