The results above were derived using a simple economic model. It is relatively easy to increase the sophistication of the model to consider a wide range of ‘what if' questions about project viability and risk. One way to increase the sophistication of the modelling is to undertake systematic risk analysis using the underlying model framework.

This involves systematically varying all of the input assumptions (ACCU price, costs and so on) a large number of times, and recording the results for each simulation. The output is a series of values for net benefits that provides an indication of the likelihood of a particular outcome.

It can be used to judge, for example, the probability of a particular outcome, such as a positive net project value.

Table 10.5 summarises the input assumptions for an illustrative risk analysis of this kind. The assumptions in the table illustrate scenarios that are typically constructed using systematic risk analysis. ACCU prices are assumed to vary randomly between $5 and $30 (with an equal likelihood of any value in between).

Because ACCU prices are highly uncertain, this is a systematic approach to testing different price outcomes. Private co-benefits are also uncertain. For the systematic risk analysis presented here, it is assumed that there is an 80% chance that any of these benefits will emerge in any given year.

For public co-benefits, 20% is assumed. Cost elements are assumed to fall randomly (using a uniform probability distribution) along the ranges set out above.

Source: CIE calculations.

Figures 10.1 and 10.2 summarise the probability distribution of outcomes for net benefits, including all benefits (Figure 10.1) and ACCU revenue only benefits (Figure 10.2).

Figure 10.1 indicates that, under the specified assumptions, there is a wide range of possible net benefits when all benefits (ACCU revenue and co-benefits) are taken into account. The chart suggests that there is a 54.3% chance of net benefits greater than zero, and a 45.1% chance of a net loss of up to $200 000.

There is a 0.6% chance of a net loss greater than $200 000. The interpretation of these outcomes depends on the preferences and risk profile of the farm enterprise. 

Data source: CIE simulations.

Figure 10.2 shows results when only ACCU revenues are counted in benefits. In this case, there is only a 28.5% chance of generating positive net benefits from the project. There is a 66.7% chance of a net loss of up to $200 000 and 4.8% chance of a net loss greater than $200 000.
  

Data source: CIE simulations.