Evaluating the power investment options with uncertainty in climate policy
AbstractThis paper uses a real options approach (ROA) for analysing the effects of government climate policy uncertainty on private investors' decision-making in the power sector. It presents an analysis undertaken by the International Energy Agency (IEA) that implements ROA within a dynamic programming approach for technology investment choice. Case studies for gas, coal and nuclear power investment are undertaken with the model. Illustrative results from the model indicate four broad conclusions: i) climate change policy risks can become large if there is only a short time between a future climate policy event such as post-2012 and the time when the investment decision is being made; ii) the way in which CO2 and fuel price variations feed through to electricity price variations is an important determinant of the overall investment risk that companies will face; iii) investment risks vary according to the technology being considered, with nuclear power appearing to be particularly exposed to fuel and CO2 price risks under various assumptions; and iv) the government will be able to reduce investors' risks by implementing long-term (say 10 years) rather than short-term (say 5 years) climate change policy frameworks. Contributions of this study include: (1) having created a step function with stochastic volume of jump at a particular time to simulate carbon price shock under a particular climate policy event; (2) quantifying the implicit risk premium of carbon price uncertainty to investors in new capacity; (3) evaluating carbon price risk alongside energy price risk in investment decision-making; and (4) demonstrating ROA to be a useful tool to quantify the impacts of climate change policy uncertainty on power investment.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Energy Economics.
Volume (Year): 30 (2008)
Issue (Month): 4 (July)
Contact details of provider:
Web page: http://www.elsevier.com/locate/eneco
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Laurikka, Harri, 2006. "Option value of gasification technology within an emissions trading scheme," Energy Policy, Elsevier, vol. 34(18), pages 3916-3928, December.
- Lin, Tyrone T. & Ko, Chuan-Chuan & Yeh, Hsin-Ni, 2007. "Applying real options in investment decisions relating to environmental pollution," Energy Policy, Elsevier, vol. 35(4), pages 2426-2432, April.
- Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
- Gerard H. Kuper & Daan P. van Soest, 2006.
"Does Oil Price Uncertainty Affect Energy Use?,"
The Energy Journal,
International Association for Energy Economics, vol. 0(Number 1), pages 55-78.
- Geoffrey Rothwell, 2006. "A Real Options Approach to Evaluating New Nuclear Power Plants," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 87-54.
- Laude, Audrey & Jonen, Christian, 2013. "Biomass and CCS: The influence of technical change," Energy Policy, Elsevier, vol. 60(C), pages 916-924.
- Westner, Günther & Madlener, Reinhard, 2010.
"Investment in New Power Generation under Uncertainty: Benefits of CHP vs Condensing Plants in a Copula-Based Analysis,"
FCN Working Papers
12/2010, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
- Westner, Günther & Madlener, Reinhard, 2012. "Investment in new power generation under uncertainty: Benefits of CHP vs. condensing plants in a copula-based analysis," Energy Economics, Elsevier, vol. 34(1), pages 31-44.
- Zhang, Dongjie & Liu, Pei & Ma, Linwei & LI, Zheng, 2013. "A multi-period optimization model for planning of China's power sector with consideration of carbon dioxide mitigation—The importance of continuous and stable carbon mitigation policy," Energy Policy, Elsevier, vol. 58(C), pages 319-328.
- Alexander Brauneis & Michael Loretz & Roland Mestel & Stefan Palan, 2011.
"Inducing Low-Carbon Investment in the Electric Power Industry through a Price Floor for Emissions Trading,"
2011.74, Fondazione Eni Enrico Mattei.
- Brauneis, Alexander & Mestel, Roland & Palan, Stefan, 2013. "Inducing low-carbon investment in the electric power industry through a price floor for emissions trading," Energy Policy, Elsevier, vol. 53(C), pages 190-204.
- Alexander Brauneis & Roland Mestel & Stefan Palan & Michael Loretz, 2011. "Inducing Low-Carbon Investment in the Electric Power Industry through a Price Floor for Emissions Trading," Working Paper Series, Social and Economic Sciences 2011-01, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
- Wilson, Nathan E., 2012. "Uncertain regulatory timing and market dynamics," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 102-115.
- Bazilian, Morgan & Hobbs, Benjamin F. & Blyth, Will & MacGill, Iain & Howells, Mark, 2011. "Interactions between energy security and climate change: A focus on developing countries," Energy Policy, Elsevier, vol. 39(6), pages 3750-3756, June.
- Hervé-Mignucci, Morgan, 2011. "Rôle du signal prix du carbone sur les décisions d'investissement des entreprises," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/8200 edited by Keppler, Jan Horst, December.
- Nemet, Gregory F., 2010. "Robust incentives and the design of a climate change governance regime," Energy Policy, Elsevier, vol. 38(11), pages 7216-7225, November.
- Massol, O. & Tchung-Ming, S., 2012. "Joining the CCS Club! Insights from a Northwest European CO2 Pipeline Project," Working Papers 12/10, Department of Economics, City University London.
- Tolis, Athanasios I. & Rentizelas, Athanasios A., 2011. "An impact assessment of electricity and emission allowances pricing in optimised expansion planning of power sector portfolios," Applied Energy, Elsevier, vol. 88(11), pages 3791-3806.
- Svensson, Elin & Berntsson, Thore & Strömberg, Ann-Brith & Patriksson, Michael, 2009. "An optimization methodology for identifying robust process integration investments under uncertainty," Energy Policy, Elsevier, vol. 37(2), pages 680-685, February.
- Lambie, Neil Ross, 2010.
"Understanding the effect of an emissions trading scheme on electricity generator investment and retirement behaviour: the proposed Carbon Pollution Reduction Scheme,"
Australian Journal of Agricultural and Resource Economics,
Australian Agricultural and Resource Economics Society, vol. 54(2), June.
- Neil Ross Lambie, 2010. "Understanding the effect of an emissions trading scheme on electricity generator investment and retirement behaviour: the proposed Carbon Pollution Reduction Scheme," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(2), pages 203-217, 04.
- John Foster & Liam Wagner & Phil Wild & Junhua Zhao & Lucas Skoofa & Craig Froome, 2011. "Market and Economic Modelling of the Intelligent Grid: End of Year Report 2009," Energy Economics and Management Group Working Papers 09, School of Economics, University of Queensland, Australia.
- John Foster & Liam Wagner & Phil Wild & Junhua Zhao & Lucas Skoofa & Craig Froome & Ariel Liebman, 2011. "Market and Economic Modelling of the Intelligent Grid: End of Year Report 2010," Energy Economics and Management Group Working Papers 10, School of Economics, University of Queensland, Australia.
- Blyth, William & Bunn, Derek & Kettunen, Janne & Wilson, Tom, 2009. "Policy interactions, risk and price formation in carbon markets," Energy Policy, Elsevier, vol. 37(12), pages 5192-5207, December.
- repec:dui:wpaper:1305 is not listed on IDEAS
- Tolis, Athanasios & Doukelis, Aggelos & Tatsiopoulos, Ilias, 2010. "Stochastic interest rates in the analysis of energy investments: Implications on economic performance and sustainability," Applied Energy, Elsevier, vol. 87(8), pages 2479-2490, August.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.