Climate Policy Uncertainty and Investment Risk (International Energy Agency)

Our climate is changing. Less certain, however, is the timing and magnitude of climate change, and the cost of transition to a low-carbon world. This book identifies how climate change policy uncertainty may affect investment behaviour in the power sector. For power companies, where capital stock is intensive and long-lived, those risks rank among the biggest and can create an incentive to delay investment. Our analysis results show that the risk premiums of climate change uncertainty can add 40% of construction costs of the plant for power investors, and 10% of price surcharges for the electricity end-users. Climate Policy Uncertainty and Investment Risk tells what can be done in policy design to reduce these costs. Table of Content : Executive Summary Introduction Approach to Quantifying Uncertainty Risk Premiums Use and Interpretation of Results 1. Introduction -Climate Change Uncertainties 2. Approach to Quantifying Uncertainty -Relevance to Policy Makers -How Do We Represent Uncertainty? -How Does the Model Work -Interpretation of Options Value -Modelling Prices -Limits of the Modelling Approach 3. Investment Threshholds -CO2 Price Risk -CO2 and Fuel Price Risk -Policy Options 4. Company Perspectives on Managing Risks -Importance of Marketing Structure -Climate Change Policy Risks in the New World -Technical and Other Risks -Managing Risk 5. Implications for Policy Makers -Implications for Energy Projections -Creating Policy Uncertainty Appendix 1. Technology Assumptions and Result Summary Appendix 2. Technology Interaction Effects Appendix 3. Companies Consulted During the Study References