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The Economics of Adoption of Industrial Cogeneration: A Deterministic Model in Continuous Time

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Author Info

  • Reinhard Madlener

    ()
    (Center for Energy Policy and Economics CEPE, Department of Management, Technology and Economics, ETH Zurich, Switzerland)

  • Marcel Wickart

    ()
    (Center for Energy Policy and Economics CEPE, Department of Management, Technology and Economics, ETH Zurich, Switzerland)

Abstract

We conceptualize and model the decision-making problem of an industrial investor having the choice to adopt either some cogeneration or some heat-only generating technology, or a combination of the two. The deterministic model suggested is specified in continuous time, takes a lifetime perspective, and explicitly accounts for the impact of technical change and variations in other parameters on the optimal timing to adopt a cogeneration system and the optimal capacity choice/mix. The firm is flexible in postponing the investment decision. Uncertainty is incorporated by varying energy prices and base load duration. In a sensitivity analysis we show that the optimal capacity decision can change discontinuously due to regime shifts caused by changes in key variables, making investment decisions risky (risk of a suboptimal capacity choice) and optimal policy design very challenging. In numerical simulations, we provide evidence that technical progress and other changes in other important parameters can affect the optimal timing of adoption and the optimal capacity mix in important ways. Hence, if adopters are heterogeneous, this also has important implications on the optimal diffusion path of CHP technology. At the energy policy level, our findings of discrete jumps in the optimal cogeneration capacity level call for tailored cogeneration policies according to the specific characteristics of the firms, or industrial branches. At the more general level, the model could be useful for any kind of co-production where by-products can either be sold in the market or, alternatively, used as an input in some other production process of the firm concerned.

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Bibliographic Info

Paper provided by CEPE Center for Energy Policy and Economics, ETH Zurich in its series CEPE Working paper series with number 03-27.

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Length: 41 pages
Date of creation: Dec 2003
Date of revision:
Handle: RePEc:cee:wpcepe:03-27

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Related research

Keywords: Cogeneration; CHP; Technology adoption; Technical change;

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References

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  1. Dobbs, Ian M., 1982. "Combined heat and power economics," Energy Economics, Elsevier, vol. 4(4), pages 276-285, October.
  2. Ireland, N & Stoneman, P, 1986. "Technological Diffusion, Expectations and Welfare," Oxford Economic Papers, Oxford University Press, vol. 38(2), pages 283-304, July.
  3. Stoneman, Paul & Kwon, Myung Joong, 1996. "Technology Adoption and Firm Profitability," Economic Journal, Royal Economic Society, vol. 106(437), pages 952-62, July.
  4. Kwon, Oh Sang & Yun, Won-Cheol, 2003. "Measuring economies of scope for cogeneration systems in Korea: a nonparametric approach," Energy Economics, Elsevier, vol. 25(4), pages 331-338, July.
  5. Karshenas, Massoud & Stoneman, Paul, 1990. "Rank, Stock, Order And Epidemic Effects In The Diffusion Of New Process Technologies : An Empirical Model," The Warwick Economics Research Paper Series (TWERPS) 358, University of Warwick, Department of Economics.
  6. Chi-Keung Woo, 1988. "Inefficiency of Avoided Cost Pricing of Cogenerated Power," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 103-113.
  7. Bonilla, David & Akisawa, Atsushi & Kashiwagi, Takao, 2003. "Modelling the adoption of industrial cogeneration in Japan using manufacturing plant survey data," Energy Policy, Elsevier, vol. 31(9), pages 895-910, July.
  8. Rosenberg, Nathan, 1976. "On Technological Expectations," Economic Journal, Royal Economic Society, vol. 86(343), pages 523-35, September.
  9. Peter Zweifel & Konstantin Beck, 1987. "Utilities and Cogeneration: Some Regulatory Problems," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-15.
  10. Dismukes, David E. & Kleit, Andrew N., 1999. "Cogeneration and electric power industry restructuring," Resource and Energy Economics, Elsevier, vol. 21(2), pages 153-166, May.
  11. Fox-Penner, Peter S., 1990. "Regulating independent power producers : Lessons of the PURPA approach," Resources and Energy, Elsevier, vol. 12(1), pages 117-141, April.
  12. Strachan, Neil & Dowlatabadi, Hadi, 2002. "Distributed generation and distribution utilities," Energy Policy, Elsevier, vol. 30(8), pages 649-661, June.
  13. Anandalingam, G., 1985. "Government policy and industrial investment in cogeneration in the USA," Energy Economics, Elsevier, vol. 7(2), pages 117-126, April.
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Cited by:
  1. Silvia Banfi & Massimo Filippini & Andrea Horehájová, 2007. "Hedonic Price Functions for Zurich and Lugano with Special Focus on Electrosmog," CEPE Working paper series 07-57, CEPE Center for Energy Policy and Economics, ETH Zurich.
  2. Silvia Banfi & Massimo Filippini & Andrea Horeh�jov�, 2012. "Using a choice experiment to estimate the benefits of a reduction of externalities in urban areas with special focus on electrosmog," Applied Economics, Taylor & Francis Journals, vol. 44(3), pages 387-397, January.

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