(109a) Energy Reduction Investment Analysis: Price Volatility Effects

Energy prices have experienced significant volatility in recent years. For example, natural gas prices ranged from $4 to $15 per MM BTU's in calendar years 2005 and 2006. Future prices are uncertain but are likely to retain a high level of volatility. This volatility complicates analysis of potential plant capital investments to reduce energy usage, in particular those that involve consideration of alternate energy sources, since traditional financial investment valuation assumes that future cash flows are known exactly. Yet, this is clearly not the case for many energy saving investments. Failure to recognize the effect of volatility on economic analysis can result in incorrectly valuing the potential financial return of the investment. In this paper, appropriate techniques to evaluate such investments are presented along with case studies illustrating the approach.