Economic Analysis of Energy Projects with Uncertainty

Abstract

The lack of precision in an economic analysis of an energy production facility is expressed quantitatively with an uncertainty to the 68% confidence level. The sensitivities of various parameters to imperfect projections is propagated through a fairly simple technique into an overall uncertainty for the feasibility indicator, such as benefit‐cost (BC) ratio. The technique assumes that each of the variable parameters is unrelated, from a Gaussian population, and that the individual sensitivities have a normal probability distribution. The effects of these assumptions on applications of the uncertainty technique are described. The technique is illustrated through a case study involving the economic analyses of hydropower feasibility.