A client with an exposure to the electricity-generating sector of a major European economy asked us to develop a tool that would help its staff assess the outlook for the wholesale price of electricity over the next 40 years. We began by estimating a small empirical model. It included three behavioural equations: one for electricity demand; one for electricity supply; and one for investment in new generating capacity. Once the client was satisfied with the way that our model worked, we built a front end that allowed them to investigate the possible response of electricity prices to a change in a key economic driver, such as the pace of economic growth.
When the project was complete, the client was left with a framework within which they could assess the potential returns to their investment under a variety of economic scenarios.