Beyond sensitivity analysis: A methodology to handle fuel and electricity prices when designing energy scenarios. (May 2018) - Lund, Henrik
Highlights: World market oil prices and international electricity prices are difficult to predict. A historical analysis of traditional electricity price predictions leads to the conclusion that they are almost always wrong. A new methodology that assumes fluctuating prices is introduced and cases of using it are described. The cases illustrate that such a methodological approach influences not only the assessment but also the design of the scenario. Abstract: World market fuel prices vary and have historically been very difficult to predict. Especially the price of oil has shown remarkable and unexpected increases and decreases throughout the past 5 decades. The same kind of uncertainty can be seen in many of the new cross-border markets for the trade of electricity, which have been introduced in recent decades. These uncertainties pose a challenge to the design and assessment of future energy strategies and investments, especially in the economic assessment of renewable energy versus business-as-usual scenarios based on fossil fuels. From a methodological point of view, the typical way of handling this challenge has been to predict future prices as accurately as possible and then conduct a sensitivity analysis. This paper includes a historical analysis of such predictions, leading to the conclusion that they are almost always wrong. Not only are they wrong in their prediction of price levels, but also in the sense that they always seem to predict a smooth growth or decrease. This paper introduces a new method and reports the results of applying it on the case of energy scenarios for Denmark. The method implies the expectation of fluctuating fuel and external electricity prices.