Incorporating risk and uncertainty in power system planning

Power system planners face the challenge of determining the type and timing of major investments under conditions of great uncertainty in predicting the future trends of major planning parameters such as power demand, capital costs and international fuel prices. Failure to match reasonably closely the ex ante selected development program with the ex post most desirable least-cost expansion program for meeting demand can impose substantial cost penalty on the host economy. This could disrupt the implementation of macroeconomic policies for public investment, pricing, balance of payments and growth of the productive sectors. Three promising methods have been identified for addressing risk and uncertainty in power planning. These are: (a) a stochastic optimization power planning model; (b) a strategic risk-tradeoff model for assessing the robustness of power expansion plans; and (c) the adaptation of finance valuation methods. Nevertheless, a preliminary comparative evaluation of these methods does not provide an adequate basis for identifying any one of them as clearly superior over the others. There is, therefore, the need of applying these methods in case studies in order to test them for effectiveness, acceptability and policy implications.