Governments and their Ministries of Finance need to make decisions that manage the financial risk—for example from policy missteps or unanticipated technological or geopolitical developments—of infrastructure investments as part of the low-carbon transition.
Such decisions are best made when supported by the appropriate analysis, and scenario analysis is a tried and tested tool for assessing and managing these types of risk. The most interesting cases for analysis may be where infrastructure investments are attractive in some future energy systems, but unattractive in others.
- The low-carbon transition shares risks of policy missteps and associated costs with other industrial transitions, with the added complication that delay could make it harder and more expensive to meet climate change mitigation commitments.
- With a comprehensive range of scenarios that include the economic impact of infrastructure assets, Ministries of Finance can triage infrastructure investment options using a decision tree. Individual infrastructure investment decisions would also need to consider their contribution to technology and system development, including future cost reductions.
- In Europe, the risk arising from uncertainty around the energy transition path has likely peaked and is falling due to falling costs of renewable energy and energy storage, which could make infrastructure investments easier.
Continuing to tie electricity prices to fossil fuel generation prices will increasingly impose risks on renewable generators that they cannot manage, increasing the risk and financing cost of renewable generation without incentivizing investment or operating behavior that benefits system costs or reliability. Ministries of Finance need to be aware of these risks, as well as the potential long-term benefits of an energy system that is less exposed to the volatility of global commodity markets.
Ministries of Finance can undertake five key actions to reduce risk and benefit from potentially lower costs and volatility of future energy systems: (1) understand the range of technology systems and energy system designs that could become available or evolve in the coming years; (2) work with other policymakers to evaluate and triage infrastructure projects rapidly; (3) where the economics of projects are dependent on the transition path, explore and develop options to manage technology and path risk; (4) support Energy Ministries in the reform and innovation of energy markets so they are suited to support low-carbon energy systems; (5) focus on the financing costs of new, low-carbon energy supplies, especially where interest rates are high and capital is scarce.
Keywords
energy pathwayspolicy riskrisk managementscenariosuncertainty
