Probabilistic Cost Estimating for the Great Plains Coal Gasification Plant

Uncertainty in energy supply investment decisions is a significant and growing problem because of inflation, longer lead times, the growing complexity of emerging technology, and other economic and environmental factors. Traditional methods of incorporating uncertainty into cost analyses through such factors as "contingency" or "unallocated cost" are unable to quantify this growing range of uncertainty. Applied Decision Analysis, Inc. (ADA) has applied a unique approach to the plant proposed by Great Plains Gasification Associates to gasify North Dakota lignite. The cost analysis explicitly incorporates the uncertainty and complexity of the investment decision in an understandable, systematic fashion. The key concept is the use of probability to describe uncertainty. Probabilities in the analysis represent expert opinions; they show the range within which a variable is likely to fall, and the relative likelihood of each interval within the range. The bottom line is a direct measure of the risk of the project—a probability distribution on the relevant cost variable. In addition, the study serves as a lasting tool for clarifying perceptions regarding uncertainty, understanding their implications, and communicating these results among the parties involved.