Modeling Technology Adoption as an Irreversible Investment Under Uncertainty: The Case of the Turkish Electricity Supply Industry
AbstractThis paper studies energy conversion technology adoption in the electricity supply sector from the perspective of irreversible investments under uncertainty, and with a particular interest in environmental sustainability. We develop a dynamic technology adoption model that is firmly rooted in economic theory and that takes important determinants of optimal investment in available technologies (e.g. life-cycle capital and operation cost) explicitly into account. Uncertainty is introduced for the demand for peak-load capacity, unit generation costs, and for the average electricity price. We test the model empirically by applying it to data for the Turkish power supply industry. The model-guided optimal investment results based on net present value considerations exhibit significant deviations from the actual investment outcome. We find that the increased adoption of natural-gas-fired power generation technologies in Turkey in recent years, while contributing to environmental sustainability, has had doubtful merits from an investor’s perspective.
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.
Bibliographic InfoPaper provided by CEPE Center for Energy Policy and Economics, ETH Zurich in its series CEPE Working paper series with number 04-30.
Length: 32 pages
Date of creation: Feb 2004
Date of revision:
Technology adoption; Irreversible investment under uncertainty; Real options; Electricity supply; Dynamic optimization;
Other versions of this item:
- Madlener, Reinhard & Kumbaroglu, Gurkan & Ediger, Volkan S., 2005. "Modeling technology adoption as an irreversible investment under uncertainty: the case of the Turkish electricity supply industry," Energy Economics, Elsevier, vol. 27(1), pages 139-163, January.
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.:
- Saman Majd & Robert S. Pindyck, 1987.
"Time to Build, Option Value, and Investment Decisions,"
NBER Working Papers
1654, National Bureau of Economic Research, Inc.
- Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March.
- Moreira, Ajax & Rocha, Katia & David, Pedro, 2004. "Thermopower generation investment in Brazil--economic conditions," Energy Policy, Elsevier, vol. 32(1), pages 91-100, January.
- James G. MacKinnon, 1995.
"Numerical Distribution Functions for Unit Root and Cointegration Tests,"
918, Queen's University, Department of Economics.
- MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-18, Nov.-Dec..
- John Y. Campbell & Pierre Perron, 1991.
"Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots,"
in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220
National Bureau of Economic Research, Inc.
- Campbell, John & Perron, Pierre, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," Scholarly Articles 3374863, Harvard University Department of Economics.
- John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Technical Working Papers 0100, National Bureau of Economic Research, Inc.
- Campbell, J.Y. & Perron, P., 1991. "Pitfalls and Opportunities: What Macroeconomics should know about unit roots," Papers 360, Princeton, Department of Economics - Econometric Research Program.
- Kobila, T. Ø., 1993. "An application of reflected diffusions to the problem of choosing between hydro and thermal power generation," Stochastic Processes and their Applications, Elsevier, vol. 44(1), pages 117-139, January.
- Balcer, Yves & Lippman, Steven A., 1984. "Technological expectations and adoption of improved technology," Journal of Economic Theory, Elsevier, vol. 34(2), pages 292-318, December.
- Dyner, Isaac & Larsen, Erik R., 2001. "From planning to strategy in the electricity industry," Energy Policy, Elsevier, vol. 29(13), pages 1145-1154, November.
- Kumbaroglu, Gurkan Selcuk, 2003. "Environmental taxation and economic effects: a computable general equilibrium analysis for Turkey," Journal of Policy Modeling, Elsevier, vol. 25(8), pages 795-810, November.
- Bar-Ilan, Avner & Strange, William C, 1996. "Investment Lags," American Economic Review, American Economic Association, vol. 86(3), pages 610-22, June.
- Brown, Gardner, Jr & Johnson, M Bruce, 1969. "Public Utility Pricing and Output under Risk," American Economic Review, American Economic Association, vol. 59(1), pages 119-28, March.
- Keppo, Jussi & Lu, Hao, 2003. "Real options and a large producer: the case of electricity markets," Energy Economics, Elsevier, vol. 25(5), pages 459-472, September.
- Sarkar, Jayati, 1998. " Technological Diffusion: Alternative Theories and Historical Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 12(2), pages 131-76, April.
- Pindyck, Robert S., 1993.
"Investments of uncertain cost,"
Journal of Financial Economics,
Elsevier, vol. 34(1), pages 53-76, August.
- Alvarez, Luis H. R. & Keppo, Jussi, 2002. "The impact of delivery lags on irreversible investment under uncertainty," European Journal of Operational Research, Elsevier, vol. 136(1), pages 173-180, January.
- Arikan, Yildiz & Kumbaroglu, Gurkan, 2001. "Endogenising emission taxes : A general equilibrium type optimisation model applied for Turkey," Energy Policy, Elsevier, vol. 29(12), pages 1045-1056, October.
- Doucet, Joseph A. & Chaton, Corinne, 2003. "Uncertainty and Investment in Electricity Generation with an Application to the Case of Hydro-Québec," Economics Papers from University Paris Dauphine 123456789/11510, Paris Dauphine University.
- Nissan Levin & Asher Tishler & Jacob Zahavi, 1985. "Capacity Expansion of Power Generation Systems with Uncertainty in the Prices of Primary Energy Resources," Management Science, INFORMS, vol. 31(2), pages 175-187, February.
- Bar-Ilan, Avner & Strange, William C., 1999. "The Timing and Intensity of Investment," Journal of Macroeconomics, Elsevier, vol. 21(1), pages 57-77, January.
- Silvia Banfi & Massimo Filippini & Andrea Horehájová, 2007.
"Using a Choice Experiment to Estimate the Benefits of a Reduction of Externalities in Urban Areas with Special Focus on Electrosmog,"
CEPE Working paper series
07-58, CEPE Center for Energy Policy and Economics, ETH Zurich.
- 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.
- Madlener, Reinhard & Koller, Martin, 2007.
"Economic and CO2 mitigation impacts of promoting biomass heating systems: An input-output study for Vorarlberg, Austria,"
Elsevier, vol. 35(12), pages 6021-6035, December.
- Reinhard Madlener & Martin Koller, 2006. "Economic and CO2 mitigation impacts of promoting biomass heating systems: an input-output study for Vorarlberg, Austria," CEPE Working paper series 06-50, CEPE Center for Energy Policy and Economics, ETH Zurich.
- Zon, Adriaan van & Fuss, Sabine, 2006. "Irreversible Investment under Uncertainty in Electricity Generation: A Clay-Clay-Vintage Portfolio Approach with an Application to Climate Change Policy in the UK," MERIT Working Papers 035, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
- Kumbaroglu, Gürkan & Madlener, Reinhard & Demirel, Mustafa, 2008.
"A real options evaluation model for the diffusion prospects of new renewable power generation technologies,"
Elsevier, vol. 30(4), pages 1882-1908, July.
- Gürkan Kumbaroglu & Reinhard Madlener & Mustafa Demirel, 2004. "A Real Options Evaluation Model for the Diffusion Prospects of New Renewable Power Generation Technologies," CEPE Working paper series 04-35, CEPE Center for Energy Policy and Economics, ETH Zurich.
- 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.
- Reinhard Madlener & Stefan Vögtli, 2006. "Diffusion of bioenergy in urban areas: socio-economic analysis of the planned Swiss wood-fired cogeneration plant in Basel," CEPE Working paper series 06-53, CEPE Center for Energy Policy and Economics, ETH Zurich.
- Huang, Yun-Hsun & Wu, Jung-Hua, 2008. "A portfolio risk analysis on electricity supply planning," Energy Policy, Elsevier, vol. 36(2), pages 627-641, February.
- Fuss, Sabine & Johansson, Daniel J.A. & Szolgayova, Jana & Obersteiner, Michael, 2009. "Impact of climate policy uncertainty on the adoption of electricity generating technologies," Energy Policy, Elsevier, vol. 37(2), pages 733-743, February.
- Fernandes, Bartolomeu & Cunha, Jorge & Ferreira, Paula, 2011. "The use of real options approach in energy sector investments," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(9), pages 4491-4497.
- ToksarI, M. Duran, 2009. "Estimating the net electricity energy generation and demand using the ant colony optimization approach: Case of Turkey," Energy Policy, Elsevier, vol. 37(3), pages 1181-1187, March.
- 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.
- Rentizelas, Athanasios A. & Tolis, Athanasios I. & Tatsiopoulos, Ilias P., 2012. "Investment planning in electricity production under CO2 price uncertainty," International Journal of Production Economics, Elsevier, vol. 140(2), pages 622-629.
- Eberhard Jochem, 2005. "An Agenda for Energy and Material Efficiency Policy – An Element of Technology Policy for a More Sustainable Use of Natural Resources," CEPE Working paper series 05-40, CEPE Center for Energy Policy and Economics, ETH Zurich.
- Reinhard Madlener & Carlos Henggeler Antunes & Luis C. Dias, 2006. "Multi-Criteria versus Data Envelopment Analysis for Assessing the Performance of Biogas Plants," CEPE Working paper series 06-49, CEPE Center for Energy Policy and Economics, ETH Zurich.
- Bergek, Anna & Mignon, Ingrid & Sundberg, Gunnel, 2013. "Who invests in renewable electricity production? Empirical evidence and suggestions for further research," Energy Policy, Elsevier, vol. 56(C), pages 568-581.
- Lise, Wietze & Kruseman, Gideon, 2008. "Long-term price and environmental effects in a liberalised electricity market," Energy Economics, Elsevier, vol. 30(2), pages 230-248, March.
- Tolis, Athanasios I. & Rentizelas, Athanasios A. & Tatsiopoulos, Ilias P., 2010. "Time-dependent opportunities in energy business: A comparative study of locally available renewable and conventional fuels," Renewable and Sustainable Energy Reviews, Elsevier, vol. 14(1), pages 384-393, January.
- 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, October -.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Carlos Ordas).
If references are entirely missing, you can add them using this form.