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How to Proceed with Competing Alternative Energy Technologies: a Real Options Analysis

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Author Info
Siddiqui, Afzal
Fleten, Stein-Erik
Abstract

Concerns with CO2 emissions are creating incentives for the development and deployment of energy technologies that do not use fossil fuels. Indeed, such technologies would provide tangible benefits in terms of avoided fossil-fuel costs, which are likely to increase as restrictions on CO2 emissions are imposed. However, there are a number of challenges that need to be overcome, and the current costs of developing new alternative energy technologies would be too high to be handled privately. We analyse how a government may proceed with a staged development of meeting electricity demand as fossil-fuel sources are being phased out. A large-scale, new alternative technology is one possibility, where one would start a major research and development programme as an intermediate step. Alternatively, the government could choose to deploy an existing renewable energy technology, and using the real options framework, we compare the two projects to provide policy implications on how one might proceed.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7355.

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Date of creation: 28 Feb 2008
Date of revision: 04 May 2009
Handle: RePEc:pra:mprapa:7355

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Related research
Keywords: Alternative energy technologies; CO2 emissions; environmental policy; real options;

Find related papers by JEL classification:
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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References listed on IDEAS
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.:
  1. Geoffrey Rothwell, 2006. "A Real Options Approach to Evaluating New Nuclear Power Plants," The Energy Journal, International Association for Energy Economics, vol. 27(1), pages 37-54.
  2. Dixit, Avinash, 1993. "Choosing among alternative discrete investment projects under uncertainty," Economics Letters, Elsevier, vol. 41(3), pages 265-268. [Downloadable!] (restricted)
  3. M. L. Weitzman & K. Roberts, 1979. "Funding Criteria for Research, Development and Exploration Projects," Working papers 234, Massachusetts Institute of Technology (MIT), Department of Economics.
    Other versions:
  4. Davis, Graham A. & Owens, Brandon, 2003. "Optimizing the level of renewable electric R&D expenditures using real options analysis," Energy Policy, Elsevier, vol. 31(15), pages 1589-1608, December. [Downloadable!] (restricted)
  5. Pindyck, Robert S., 1993. "Investments of uncertain cost," Journal of Financial Economics, Elsevier, vol. 34(1), pages 53-76, August. [Downloadable!] (restricted)
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  6. Gollier, Christian & Proult, David & Thais, Francoise & Walgenwitz, Gilles, 2005. "Choice of nuclear power investments under price uncertainty: Valuing modularity," Energy Economics, Elsevier, vol. 27(4), pages 667-685, July. [Downloadable!] (restricted)
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  7. Saman Majd & Robert S. Pindyck, 1989. "The Learning Curve and Optimal Production under Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 331-343, Autumn. [Downloadable!] (restricted)
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  8. Jean-Paul Décamps & Thomas Mariotti & Stéphane Villeneuve, 2006. "Irreversible investment in alternative projects," Economic Theory, Springer, vol. 28(2), pages 425-448, 06. [Downloadable!] (restricted)
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