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Environmental Impact Assessment and Investment under Uncertainty. An Application to Power Grid Interconnection

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  • Saphores, Jean-Daniel
  • Gravel, Éric
  • Bernard, Jean-Thomas

Abstract

We consider a firm that must undergo a costly and time-consuming regulatory process before making an irreversible, lagged investment whose value varies randomly. We analyze two cases: regulatory approval is valid forever or it expires after some time. We apply our model to Hydro-Québec's project of building a 1250 megawatts interconnection with Ontario. We find that the firm may start the regulatory process earlier if regulatory approval is valid long enough or if uncertainty is high enough; it postpones it otherwise. When to start the reglulatory process and when to invest depend on the duration of the regulatory green light.

Suggested Citation

  • Saphores, Jean-Daniel & Gravel, Éric & Bernard, Jean-Thomas, 2003. "Environmental Impact Assessment and Investment under Uncertainty. An Application to Power Grid Interconnection," Cahiers de recherche 0303, GREEN.
    • Handle: RePEc:lvl:lagrcr:0303
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    File URL: http://www.green.ecn.ulaval.ca/CahiersGREEN2003/03-03.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Regulation; uncertainty; irreversibility; real options; interconnections;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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