Uncertainties and Risk in Economic Assessments. Appendix IV

Risk obviously involves uncertainty. Uncertainty is the set of all outcomes, both favourable and unfavourable. The unfavourable outcomes represent risk, whereas the favourable ones represent opportunity. Thus, uncertainty can give birth to either, or both, risk and opportunity. Risk is also defined as the probability that an unfavourable outcome will occur. Similarly, opportunity is defined as the probability that a favourable outcome will occur. Uncertainty describes any situation that we do not completely control. Risk describes a situation with a probability of a negative outcome. There are several types of risk inherent in global energy projects, such as technical, cost, schedule, price, operating factor and political. Accepting risk and providing contingency to cover it is one form of risk control. Other forms of risk control include risk avoidance, risk sharing, risk reduction, risk transfer, insurance and risk containment. Energy projects have the potential to carry substantial risks and uncertainty. It is important to know how risk and uncertainty could affect expected results from the project and to identify the potential impacts on the investors (owner/operator, investing institutions and government). An analysis of risk and uncertainty will provide key information to allow decision makers to judge whether the project should proceed under the proposed terms. Such an analysis will also assist in negotiations and identification of terms that may mitigate risk or uncertainty for investors. For many energy projects, it is important to have the ability to analyse risk and find ways to best mitigate it, identify potential conflicts of interest and successfully negotiate related issues. It is recommended that investors incorporate an analysis of risk and uncertainty as part of their overall feasibility analysis of such projects. It is also recommended that investors identify the potential impact from identified risks and uncertainties on expected outcomes. Examples of risks and uncertainties related to projects include: – Risk and uncertainty associated with the market the project is attempting to capture. – Risk and uncertainty of investors' revenues from the project. – Risk and uncertainty associated with the recipient's costs and resource requirements. – Risk and uncertainty with regard to the recipient's financial and/or credit status. Sometimes a financial guarantee or credit enhancement is required, (e.g. a debt service guarantee). – Risk and uncertainty that the project will be completed or built, when or as anticipated. – Risk that other expected outcomes may not occur as anticipated and that investors' goals will not be achieved. – Risk and uncertainty of future legislative actions and regulatory change by any level of government that may adversely impact a project and its funding.