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Preparing for the Next Nuke

Using scenario analysis to help utilities map out their strategies.

Fortnightly Magazine - March 2006

If you were a utility executive today would you consider building a new nuclear power plant?

What if the United States decided to implement the emission reductions called for in the Kyoto Protocol without adopting it?

How might your business be affected by another 9/11-scale terrorist attack on a U.S. target?

What would be the impact of growing reliability problems in key U.S. power markets?

Some utility executives are asking themselves just such questions. Energy is a volatile and highly uncertain business. The list of factors that impact the North American power and gas markets is long and growing: glutted power generation, growing gas demand and rising prices, war and terrorism, increasing dependence on imports, potential (inevitable?) regulation of hydrocarbons, regulatory uncertainty regarding market organization, and the impact of new technology.

Scenario analysis is one technique used by some of the largest energy companies in the world today to effectively map strategies—and to manage the uncertainty associated with a decision about whether to build a new nuclear power plant.

In an effort to provide an independent, forward-looking perspective on markets, risks, and strategy, Global Energy Decisions developed Electric Power Horizons to provide robust alternative future energy market scenarios that challenge our clients’ existing perspectives on the future and test strategies against alternative business landscapes.

Today every energy company is rethinking and retooling its corporate strategy. The question is whether they adequately are stress-testing their strategy options and factoring uncertainty into the decision process (see Figure 1).

Past strategic mistakes can be traced to a failure to fully understand the key uncertainties and pre-determined elements that form the business environment. A key pre-condition to achieving sustainable competitive advantage is for a firm’s strategy to be consistent with its business environment.

Scenarios provide powerful tools to evaluate alternative strategies against possible energy futures. Thus, they offer a strategic compass in turbulent markets.

As risk-management tools for thinking critically and systematically about the future, scenarios can offer powerful insights to help clients manage their business across every stage of the energy business cycle.

What Is Scenario Analysis?

Developed in the late 1960s, scenario planning is a proven risk-management tool that forces managers to think critically and systematically about the uncertainty of the future.

Scenario planning works by iteratively building plausible alternative views of the future based on critical economic, regulatory, and technological driving forces. By challenging participants’ mental maps, the process checks over-optimism, provides strategic insights, engenders a common language, and leads to better decision-making.

Global Energy Decisions worked with a broad cross section of clients to identify four distinct themes that could have the greatest impact on the energy business environment over the next 20 years. The themes are:

Terrorism & Turmoil: Terrorism impact on petroleum and natural-gas supply imports, and on economic growth;