Base Case

No business plan or financial projection is a fixed, immovable object. Or, to quote German military strategist Helmuth von Moltke: “No battle plan survives contact with the enemy.”

The base case represents the “best guess” (most likely outcome) of a plan. However to properly evaluate a business this base case must then be stress tested by applying various scenarios and risk factors to it, to evaluate the potential downsides (or upsides) that could occur from this base. What happens if construction is delayed? What happens if the electricity price goes up? What happens if the policy rules change? And so on.

For example in financing projects, different types of investor may evaluate the returns of a project based on different assumptions of energy and revenue generation. Equity investors typically look at a so-called “P50” base case, whereas banks providing debt will evaluate a case based on lower energy generation (e.g. “P90”).