Approving a €900 million plant, designed to last 25 years
Energy
In ten years it risks becoming a stranded asset.
In the scenario Reduced the risk of a stranded asset on €900M, turning a bet into an option.
The protagonist & the context
The Chief Investment Officer of an integrated energy operator, with a board asking for concrete progress on the pipeline and a guaranteed purchase contract up for renewal within six months.
A national energy operator with a consolidated fossil generation base and regulated supply obligations. The proposed plant replaces capacity being decommissioned and is framed as necessary for the country's near-term energy security. Existing guaranteed purchase contracts cover the first ten years of operation.
Background
The cost curve for renewable energy has followed a near-exponential trajectory over the past decade: the levelised cost of solar PV and onshore wind fell 89% and 70% respectively between 2010 and 2023. Credible energy-transition scenarios place the competitive parity point between renewables-plus-storage and natural gas between 2030 and 2035 in most European markets. On the regulatory side, the current CO₂ price in the European ETS is already on a trajectory to double by 2030 per consensus estimates. A plant engineered to the economics of today and expected to run for 25 years assumes none of these trends accelerates — an increasingly fragile assumption.
The dilemma
The internal analysis shows an eight-year payback, a comfortable margin relative to the asset's useful life. But that calculation distributes cash flows evenly over 25 years: the reality is that the first ten years, covered by the guaranteed purchase contract, finance almost the entire return. The last ten years — when electrification, rising CO₂ costs and renewables-plus-batteries will make themselves felt most — contribute a share of return that may never materialise. Approving now means betting that a fossil plant stays competitive in a market undergoing structural change. The risk is not in year one: it is in year fifteen, arriving too late to correct.
Exhibits
Expected cumulative return of the plant year by year — about 65% of the return is concentrated in the first ten years; the remaining fifteen are exposed to the energy transition (illustrative data).
Net present value of the investment in the base case (full utilisation) and in the accelerated-transition scenario with declining usage from year ten (illustrative data).
The contradictor's analysis
- Consumption will stay at these levels for 25 years.
- The price of CO₂ won't penalize the plant.
- The cost of money will stay low.
The risk isn't the early years, it's the last ones. It pays back in 8 years, but it must live 25. Electrification, CO₂ levies and the collapse in the cost of renewables and batteries can drive usage down after year ten. A calculation that assumes the plant always at full capacity for 25 years is fragile: you risk a stranded asset, still to be paid for but that no one uses anymore.
- With CO₂ at €150/tonne, does the calculation still hold?
- When do renewables and batteries become cheaper than gas?
- If usage drops 40%, do the guaranteed purchase contracts still cover the investment?
- At what CO₂ price does the plant become dead weight, and with what probability within 10 years?
- How much of the return depends precisely on the last 10 years, the most uncertain?
Provenance: energy transition scenarios · technology cost curves · guaranteed purchase contracts · red-team base.
Resolution & consequences
Methodological note
Composite teaching case. Figures and details are illustrative; it is not a client outcome or a performance claim. Built, in the method of the Harvard Business Review, from recurring decision patterns in the sector, merged and anonymized to protect confidentiality. The «provenance» notes describe the type of evidence the engine cites with traceability in production. No Δ-CSI score is shown: composite cases have no frozen, reproducible scorecard.