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In an energy market marked by great uncertainty, energy utility companies are ill-equipped to make the major decisions they face in choosing future sources of power generation, according to a new report by Arthur D Little in cooperation with the Dresden University of Technology and Opexis GmbH.
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Arthur D. Little: Traditional forecast models cannot predict future energy mix
The new study, “Real options for the future energy mix” suggests that in an economic climate marked by depleting natural resources and increasing legislative requirements for climate protection, the traditional methods utility companies use to determine what energy sources and facilities to invest in no longer apply. The result, according to Arthur D. Little, is the current trend of potentially fruitful investment opportunities being undervalued, and therefore not pursued by utilities companies.
“Real options for the energy mix” offers a new approach, real option valuation, which allows utilities providers a broader perspective on the most promising sources of investment. The valuation is based on modelling the complete set of possible outcomes facing utility companies operating in the current climate. As a result, Arthur D. Little’s suggested valuation offers utilities companies not only the future value of different potential investment strategies, but also the likelihood of each option becoming reality and its single value.
“Given the two-way squeeze on electricity utilities – upward pressure on costs and investment, downward pressure on pricing – uncertain developments that will be more evident in the future must be taken in to consideration when making strategic investment decisions today,” said Stephen Rogers, Arthur D. Little’s Global Energy-Utility Practice Leader. “In today’s environment,” the author warns, “utilities providers using the same old valuation models to decide new investment in generation facilities risk missing positive growth opportunities, or investing in sources that are not sustainable due to rapidly changing market conditions.”
The full report, available online, outlines Arthur D. Little’s four-step approach to leading a fair valuation of energy generation investments. The report demonstrates the new approach using a synthetic case study, and explains how top management can break out of traditional corporate systems to develop more adaptable, flexible valuation techniques suitable for the current volatile industry environment.
“Real options for the future energy mix” is now available for download at www.adl.com/realoptions.
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