/4th July 2018, Ricardo G Barcelona/ “Buy low, sell high” is sound tactical advice. Capital budgeting’s prescribed ideals negate the tactic’s benefits: “Reduce volatilities, fix prices and volumes”. When there is operational flexibility, firms supply only when they earn a profit, while avoiding losses by interrupting supplies when prices are too low. As a result, “risk aversion” swaps foregone value from higher prices for “conservative”, albeit mediocre returns. Old habits, however die hard: Intuitively, the avoided losses add to the firm’s value, as well as the higher returns, when prices are high. Managers, however, lock-in long term commitments through power purchase agreements (PPAs) to achieve predictable outcomes. For intermittent renewables – wind and solar – prices are fixed for volumes delivered when available. This foregoes any price upside, while exposing the firms to continually renegotiate their contracts that increase uncertainties – and risks. Here’s why!
