EU Energy Policy Blog

As the financial crisis makes headlines around the world, it might seem to say the least a bit provocative to assert that the energy industry could learn anything from the financial sector in terms of risk management. We argue that some analytical methods borrowed from the financial literature (Portfolio Theory and Real Options) can be successfully applied to the energy sector to gain insights on the value of fuel mix diversification as a hedge against a wide range of risks.
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Under the former regulated utility regime and regulatory arrangements, many of the risks associated with power plant construction costs, operating performance, fuel price changes, and other factors were borne by consumers rather than investors. The current context for new nuclear build in power markets is significantly different with producers bearing much of the risks unless some are transferred onto other stakeholders through long term contracts and/or innovative financing arrangements.
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