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Power plant investment in restructured markets

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  • Walls, W.D.
  • Rusco, Frank W.
  • Ludwigson, Jon

Abstract

Investment opportunities in electric power generation have changed dramatically since electricity industry restructuring first began. In contrast to regulated utilities adding capacity in line with central planning and regulation, power plant investment is now more often made by independent companies who market power across multiple utility jurisdictions. Because the regulatory approval process is long and outcomes uncertain, developers often plan multiple options for a given development budget. As more information is revealed about the future prospects at different sites, options are abandoned sequentially until only projects that will be completed remain. In this paper we evaluate the decision to build new generation facilities in a changing and uncertain regulatory environment. We estimate hazard rates for new power plant projects using a database of generation projects in North America and examine in greater detail the development patterns in California and Texas, two states with very different regulatory regimes. We find that regulatory uncertainty significantly affects the pattern of development in the electric power generation industry.

Suggested Citation

  • Walls, W.D. & Rusco, Frank W. & Ludwigson, Jon, 2007. "Power plant investment in restructured markets," Energy, Elsevier, vol. 32(8), pages 1403-1413.
    • Handle: RePEc:eee:energy:v:32:y:2007:i:8:p:1403-1413
    DOI: 10.1016/j.energy.2006.11.002
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    1. Paul L. Joskow, 2003. "The Difficult Transition to Competitive Electricity Markets in the U.S," Working Papers 0308, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
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    Cited by:

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    4. Boomsma, Trine Krogh & Linnerud, Kristin, 2015. "Market and policy risk under different renewable electricity support schemes," Energy, Elsevier, vol. 89(C), pages 435-448.
    5. Sendstad, Lars H. & Hagspiel, Verena & Mikkelsen, Wilhelm Jebsen & Ravndal, Ruben & Tveitstøl, Martin, 2022. "The impact of subsidy retraction on European renewable energy investments," Energy Policy, Elsevier, vol. 160(C).
    6. Linnerud, Kristin & Andersson, Ane Marte & Fleten, Stein-Erik, 2014. "Investment timing under uncertain renewable energy policy: An empirical study of small hydropower projects," Energy, Elsevier, vol. 78(C), pages 154-164.
    7. Arabi, Behrouz & Munisamy, Susila & Emrouznejad, Ali & Shadman, Foroogh, 2014. "Power industry restructuring and eco-efficiency changes: A new slacks-based model in Malmquist–Luenberger Index measurement," Energy Policy, Elsevier, vol. 68(C), pages 132-145.
    8. Zhang, M.M. & Wang, Qunwei & Zhou, Dequn & Ding, H., 2019. "Evaluating uncertain investment decisions in low-carbon transition toward renewable energy," Applied Energy, Elsevier, vol. 240(C), pages 1049-1060.
    9. Nunes, Luis Eduardo & Lima, Marcus Vinicius Andrade de & Davison, Matthew & Leite, André Luis da Silva, 2021. "Switch and defer option in renewable energy projects: Evidences from Brazil," Energy, Elsevier, vol. 231(C).
    10. Michail Chronopoulos, Verena Hagspiel, and Stein-Erik Fleten, 2016. "Stepwise Green Investment under Policy Uncertainty," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    11. Haas, Reinhard & Lettner, Georg & Auer, Hans & Duic, Neven, 2013. "The looming revolution: How photovoltaics will change electricity markets in Europe fundamentally," Energy, Elsevier, vol. 57(C), pages 38-43.
    12. Auer, Hans & Haas, Reinhard, 2016. "On integrating large shares of variable renewables into the electricity system," Energy, Elsevier, vol. 115(P3), pages 1592-1601.
    13. Kann, Shayle, 2009. "Overcoming barriers to wind project finance in Australia," Energy Policy, Elsevier, vol. 37(8), pages 3139-3148, August.

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    More about this item

    Keywords

    Power plant investment; Electricity market restructuring; Regulatory uncertainty;
    All these keywords.

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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