Question

Once a power plant is built, what sources of uncertainty can the plant owner face that might influence its annual profits? Organize your answer in terms of sources of uncertainty that can impact a) costs; and b) revenues.

Answer 1

A power plant faces the following Sources of uncertainty:

No.1

Climate condition: Climate is uncertain; therefore, if there is cyclone the wind power may be affected, if there is rain for several days the solar power may be affected.

Impact on cost: arranging the substitutes at the above situations may be expensive.

Impact on revenues: power supply may be interrupted, which reduces revenue income of the firm.

No.2

Non-renewable source: if the source of power is coal then a colliery may be out of stock in future; therefore, the uncertainty of getting continuous collieries in future is always there.

Impact on cost: cost increases if the stock of coal is limited. This increases the extraction cost.

Impact on revenues: if the substandard coal is used in the power plant because of non-availability of good one, the carbon emission would be high and the government can restrict power production. If the production is low the revenue would be low.