With respect to hydropower, the efects of
climate change on the power system are mitigated to some extent by the normal tendency
to add generation to accommodate growth
or for feet replacement. Tese investment
decisions will have the advantage of knowledge
of the systems at the time of commitment
and the capability of the existing generation
plants in the system. Te expected outcome
will, therefore, be that the new plant will adapt
the power system in light of the changes in
climate evident in the future, with the result
that fnancial decisions with a relatively short
time horizon are still valid.
Hydropower is also a fexible resource that
ofers a variety of products of value. While
energy may be diminished in some climate
change scenarios, these other secondary benefts
will remain, although investors are somewhat
at risk if the benefts are not monetized in the
market. Greater thought will be required about
market mechanisms that mitigate investor risk
in an era of climate change.
Te regulator has a key role in managing
the risks of climate change by ensuring that
the system develops in a manner that mitigates
the detrimental efects. Most of the climate
change risk is best managed at the aggregated
level of the power system. Te system is able
to balance future additions to complement
existing resources to adapt to the changing
nature of the climate.
Q: You mentioned market mechanisms
to mitigate risk surrounding climate
change. What needs to happen here?
Rae: In many jurisdictions, a power market acts
as the primary control on generation expansion
and the revenue achieved from projects. In
these cases, investors often have the option
of some combination of fxed power sales
contracts and sales to a spot market. Other
market designs provide for all generators to
bid energy and capacity, with all participants
receiving a market clearing price, which would
be the highest cost of energy dispatched to
serve the demand.
With climate change, power markets are
likely to be a good method to allocate the risk
for project investors. Te market will adjust
the value of energy to account for scarcity
or surplus, which will provide signals to
potential investors for new plant additions.
Te difculty is the time scale required
for development and the need for advance
projects of markets to justify investment.
Te theoretical structure and operation
of markets will enable the adaptation of the
power system required for climate change.
Water resources projects are long-term
investments that will have an ultimate time
scale afected by climate change. Planning must
consider the long-term role of projects given
the potential environmental and social impacts.
Markets tend to encourage a short-term
focus for investment because of the incentives
to focus projects on the predictable energy
revenues available. A longer-term fnancial
assessment may be more important in a
changing climate because of the need to adapt
the power system to the future reality of the
climate rather than to the smaller increments
likely to occur. ■