Energy Economics and Finance
Expert-defined terms from the Certificate in Energy Planning and Policy course at London School of Planning and Management. Free to read, free to share, paired with a professional course.
Ancillary Services – Support functions that maintain grid reliability, su… #
(Related: balancing market, capacity market) Example: A battery providing frequency response during peak load. Challenge: Pricing mechanisms must reflect short‑term value without distorting investment signals.
Asset Valuation – Process of estimating the economic worth of energy infr… #
(Related: discount rate, cost of capital) Example: Valuing a wind farm using discounted cash flow. Challenge: Uncertainty in fuel prices and policy changes can skew results.
Auction Mechanism – Competitive bidding process used to allocate generati… #
(Related: capacity market, market design) Example: A sealed‑bid auction for new solar capacity. Challenge: Preventing collusion and ensuring transparent price discovery.
Balance of Plant – Non‑generation components of a power project (e #
G., Civil works, substations, control systems). (Related: project development, CAPEX) Example: The roads and foundations for a hydroelectric site. Challenge: Cost overruns in balance‑of‑plant can erode project economics.
Balancing Market – Short‑term market where imbalances between scheduled a… #
(Related: ancillary services, real‑time pricing) Example: A gas plant offering upward regulation when wind output falls short. Challenge: High volatility requires fast‑acting resources and robust settlement rules.
Base Load – Continuous, predictable electricity supply that meets minimum… #
(Related: dispatch, capacity factor) Example: Nuclear reactors providing steady output. Challenge: Integrating variable renewables while preserving base‑load reliability.
Bilateral Contract – Direct agreement between a generator and a buyer, of… #
(Related: PPA, risk allocation) Example: A 20‑year contract between a wind farm and a utility. Challenge: Counter‑party credit risk and limited market liquidity.
Blackout – Total loss of electricity supply across a defined area, usuall… #
(Related: grid resilience, capacity adequacy) Example: A cascading failure triggered by a line outage. Challenge: High economic costs and the need for robust contingency planning.
Carbon Pricing – Economic tool that assigns a monetary value to carbon em… #
(Related: carbon tax, emissions trading) Example: A $50‑per‑tonne carbon levy on fossil‑fuel generators. Challenge: Policy uncertainty and cross‑border leakage.
Carbon Tax – Fixed fee imposed on each tonne of CO₂ emitted, intended to… #
(Related: carbon pricing, policy instrument) Example: A $30‑per‑tonne tax on coal plants. Challenge: Political acceptance and impact on low‑income consumers.
Capacity Market – Mechanism that pays generators for being available to s… #
(Related: capacity credit, auction mechanism) Example: Annual contracts awarded to gas turbines for reliability. Challenge: Ensuring cost‑effectiveness and avoiding over‑compensation.
Capacity Mechanism – Broad term for policies that secure sufficient gener… #
(Related: capacity market, resource adequacy) Example: A strategic reserve that can be called upon in emergencies. Challenge: Aligning incentives with long‑term decarbonization goals.
Capacity Credit – Fraction of a generator’s output that can be counted to… #
(Related: capacity factor, resource adequacy) Example: A solar farm with a 20 % capacity credit in a hot climate. Challenge: Variability makes credit estimation complex.
Capacity Factor – Ratio of actual energy produced to the maximum possible… #
(Related: capacity credit, efficiency) Example: A wind turbine with a 35 % capacity factor. Challenge: Site‑specific wind patterns cause wide variation.
Cash Flow – Net amount of money moving into and out of a project over tim… #
(Related: discounted cash flow, financial modeling) Example: Monthly revenue from electricity sales minus operating costs. Challenge: Forecasting cash flow under volatile market prices.
Cost of Capital – Required return for investors, reflecting the risk of a… #
(Related: discount rate, WACC) Example: A 7 % cost of capital for a utility‑scale solar project. Challenge: Higher perceived risk increases financing costs.
Cost of Service – Regulatory method that sets rates based on the cost of… #
(Related: regulatory risk, tariff design) Example: A utility recovers its operating expenses through a cost‑of‑service rate. Challenge: May discourage efficiency and innovation.
Credit Risk – Probability that a counter‑party will default on financial… #
(Related: bilateral contract, risk mitigation) Example: A utility’s exposure to a renewable developer’s failure to deliver power. Challenge: Requires credit enhancements or guarantees.
Demand Response – Program where consumers adjust electricity usage in res… #
(Related: price elasticity, ancillary services) Example: Industrial load shedding during peak price spikes. Challenge: Measuring and verifying actual reductions.
Dispatch – Order in which generators are called upon to produce electrici… #
(Related: merit order, real‑time market) Example: Gas plants dispatched after cheaper wind output. Challenge: Integrating intermittent resources while maintaining system balance.
Distributed Generation – Small‑scale electricity production located close… #
(Related: microgrid, net metering) Example: Rooftop solar panels serving a residential neighborhood. Challenge: Grid integration and appropriate compensation mechanisms.
Electricity Market – Structured environment where electricity is bought a… #
(Related: spot market, capacity market) Example: A day‑ahead market clearing prices for hourly intervals. Challenge: Market power and price volatility.
Energy Arbitrage – Exploiting price differences across time or locations… #
(Related: storage, price spreads) Example: Charging batteries at night when wholesale prices are low and discharging during peak. Challenge: Requires accurate price forecasts and efficient storage technology.
Energy Efficiency – Reducing the amount of energy required to provide a s… #
(Related: demand side management, policy incentive) Example: Retrofitting building insulation to cut heating demand. Challenge: Upfront capital and split incentives between owners and users.
Energy Forecasting – Predicting future energy demand or generation using… #
(Related: load curve, scenario analysis) Example: A utility projecting hourly demand for the next week. Challenge: Uncertainty in weather, economic activity, and policy.
Energy Mix – Composition of energy sources (e #
G., Coal, gas, renewables) that supply a region’s electricity. (Related: decarbonization, resource diversification) Example: A national grid with 40 % wind, 30 % solar, 30 % gas. Challenge: Balancing reliability with emissions targets.
Energy Policy – Governmental framework shaping the development, pricing,… #
(Related: carbon pricing, renewable standards) Example: A national strategy to achieve 50 % renewable electricity by 2030. Challenge: Policy consistency and stakeholder alignment.
Energy Security – Assurance of reliable, affordable energy supply, minimi… #
(Related: strategic reserves, capacity adequacy) Example: Maintaining domestic gas reserves to hedge import reliance. Challenge: Balancing security with environmental objectives.
Energy Storage – Technologies that retain energy for later use, enhancing… #
(Related: battery, seasonal storage) Example: Lithium‑ion batteries providing fast frequency response. Challenge: High capital cost and limited cycle life.
Feed‑in Tariff – Fixed, long‑term price paid to generators for electricit… #
(Related: policy incentive, investment certainty) Example: A 0.10 $/KWh tariff for on‑shore wind. Challenge: Tariff levels must avoid over‑compensation while encouraging deployment.
Financial Modeling – Quantitative analysis using spreadsheets or software… #
(Related: cash flow, sensitivity analysis) Example: Building a model that projects IRR under varying fuel price scenarios. Challenge: Capturing all relevant risks and regulatory changes.
Financial Risk – Exposure to adverse financial outcomes due to market, cr… #
(Related: hedging, risk management) Example: A utility facing revenue loss from volatile spot prices. Challenge: Designing effective risk mitigation strategies without excessive cost.
Fuel Price Risk – Volatility in the cost of primary energy inputs, affect… #
(Related: hedging, price contracts) Example: A gas‑fired plant exposed to swing in natural‑gas prices. Challenge: Securing long‑term contracts while preserving flexibility.
Green Bond – Debt instrument earmarked for financing environmentally bene… #
(Related: ESG, capital markets) Example: A $500 million bond issued to fund offshore wind farms. Challenge: Verifying that proceeds are used for green assets and meeting reporting standards.
Hydrogen Economy – Emerging system where hydrogen serves as a fuel, feeds… #
(Related: decarbonization, energy transition) Example: Electrolyzers producing green hydrogen for transport. Challenge: High production cost and lack of extensive distribution infrastructure.
Investment Appraisal – Evaluation of the economic viability of a project,… #
(Related: financial modeling, risk analysis) Example: Assessing a solar farm’s NPV under different tax credit scenarios. Challenge: Incorporating uncertain policy and market dynamics.
Levelized Cost of Energy – Metric that expresses the per‑MWh cost of buil… #
(Related: cost comparison, technology learning curve) Example: A wind farm with an LCOE of 45 $/MWh. Challenge: Does not capture system integration costs or price volatility.
Liquidity Risk – Possibility that an entity cannot meet short‑term financ… #
(Related: working capital, financing structure) Example: A developer unable to draw on a revolving credit line during construction delays. Challenge: Maintaining adequate cash buffers and access to capital markets.
Market Power – Ability of a participant to influence prices or quantities… #
(Related: competition policy, price manipulation) Example: A dominant utility withholding capacity to raise spot prices. Challenge: Detecting abuse and implementing effective mitigation measures.
Merit Order – Ranking of generators by ascending marginal cost, dictating… #
(Related: dispatch, price formation) Example: Renewables with near‑zero marginal cost are dispatched before coal. Challenge: Incorporating non‑price factors like reliability and emissions.
Microgrid – Localized grid that can operate autonomously or connected to… #
(Related: distributed generation, resilience) Example: A campus microgrid supplying power during a utility outage. Challenge: Control complexity and regulatory barriers.
Net Metering – Billing arrangement allowing small generators to offset co… #
(Related: distributed generation, tariff design) Example: A homeowner exporting excess solar electricity to the grid. Challenge: Cost‑allocation concerns for non‑participating customers.
Nuclear Power – Low‑carbon baseload generation using nuclear fission, cha… #
(Related: capacity adequacy, risk assessment) Example: A 1 GW pressurized water reactor. Challenge: Public acceptance, waste management, and financial risk.
Oil Price Shock – Sudden, large increase in oil prices that can disrupt e… #
(Related: fuel price risk, inflation) Example: The 1973 oil embargo causing global recession. Challenge: Designing resilient energy systems that can absorb such spikes.
Operating Margin – Difference between revenue and operating expenses, exp… #
(Related: financial performance, cost of service) Example: A utility achieving a 12 % operating margin after maintenance costs. Challenge: Margin compression during low‑price periods.
Power Purchase Agreement – Long‑term contract wherein a buyer agrees to p… #
(Related: bilateral contract, risk allocation) Example: A 15‑year PPA for a solar project at $0.08/KWh. Challenge: Negotiating price terms amid regulatory uncertainty.
Power System – Integrated network of generation, transmission, distributi… #
(Related: grid reliability, system planning) Example: The national high‑voltage transmission grid. Challenge: Maintaining stability while integrating high shares of variable renewables.
Pricing Mechanism – Method used to determine electricity prices, such as… #
(Related: market design, price signals) Example: A nodal pricing system that reflects transmission constraints. Challenge: Ensuring price signals are transparent and promote efficient investment.
Regulatory Risk – Uncertainty arising from potential changes in laws, tar… #
(Related: policy risk, investment appraisal) Example: A new emissions standard that could increase operating costs for coal plants. Challenge: Investors demand higher risk premiums when regulatory outlook is unclear.
Renewable Energy Certificate – Tradable instrument representing the envir… #
(Related: green market, compliance) Example: A wind farm selling RECs to a utility to meet its RPS obligations. Challenge: Tracking provenance and preventing double counting.
Scarcity Pricing – Higher price applied when supply is insufficient relat… #
(Related: capacity market, price spikes) Example: Elevated wholesale prices during a heatwave when solar output drops. Challenge: Designing rules that avoid price manipulation while rewarding flexibility.
Seasonal Storage – Long‑duration storage solutions (e #
G., Pumped hydro, compressed air) that shift energy across seasons. (Related: energy storage, grid integration) Example: A pumped‑hydro facility storing excess winter wind for summer demand. Challenge: High capital cost and site‑specific feasibility.
Solar PV – Photovoltaic technology that converts sunlight directly into e… #
(Related: capacity factor, feed‑in tariff) Example: A 50 MW utility‑scale solar farm. Challenge: Intermittency and land use considerations.
Strategic Reserves – Government‑maintained stockpiles of fuel or generati… #
(Related: energy security, capacity adequacy) Example: A national reserve of natural gas for winter peak periods. Challenge: Cost of maintaining idle resources versus benefit of reliability.
Supply Curve – Graphical representation of the quantity of electricity of… #
(Related: market equilibrium, price formation) Example: Upward‑sloping supply reflecting higher marginal costs of peaking plants. Challenge: Accurately modeling the impact of renewables on the shape of the curve.
Tariff Design – Structuring of electricity rates, including fixed charges… #
(Related: cost of service, demand response) Example: A two‑tier tariff encouraging off‑peak consumption. Challenge: Balancing cost recovery with equity and efficiency.
Technology Learning Curve – Empirical relationship showing cost reduction… #
(Related: LCOE, innovation) Example: Solar PV costs falling 20 % for each doubling of installed capacity. Challenge: Forecasting future cost trajectories amidst policy shifts.
Transmission Congestion – Condition where transmission capacity limits pr… #
(Related: price spikes, nodal pricing) Example: Bottlenecks causing higher prices in a constrained region. Challenge: Costly upgrades and the need for market‑based congestion pricing.
Valuation Discount Rate – Rate used to discount future cash flows to pres… #
(Related: cost of capital, WACC) Example: A 6 % discount rate applied to a wind project’s cash flow. Challenge: Selecting an appropriate rate that captures both market and regulatory risk.
Virtual Power Plant – Aggregation of distributed energy resources (DERs)… #
(Related: demand response, microgrid) Example: A fleet of rooftop solar and batteries bidding into the day‑ahead market. Challenge: Communication latency and ensuring reliable performance.
Wholesale Market – Platform where large‑scale electricity transactions oc… #
(Related: spot market, capacity market) Example: An hourly auction clearing at $45/MWh. Challenge: Price volatility and the need for robust settlement systems.
Yield Curve – Graph showing interest rates across different maturities, u… #
(Related: cost of capital, bond pricing) Example: A steep yield curve indicating higher rates for longer‑term debt. Challenge: Projecting future rates for multi‑decade renewable projects.