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Optionality and Policymaking in Re-Transforming the British Power Market

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  • Michail Chronopoulos, Derek Bunn, and Afzal Siddiqui

Abstract

Conventional models to support policymaking for the energy sector have been largely based on deterministic or static settings that focus on planning welfare- maximising investment pathways. But, in a liberalised market, since investments are made by competitive, profit-maximising companies, the increased intervention of government policy in the trading arrangements creates uncertain responses to incentives. Industry may perceive policy risks to be high, and major companies may choose to act more cautiously than governments expect. This presents a modelling challenge, and we propose an extension to the use of real options in this context. We model several features of the low-carbon investment context, viz., irreversibility, delay, and competition, which impinge upon the radical policy imperatives for structural change in electricity markets to meet ambitious sustainability targets.

Suggested Citation

  • Michail Chronopoulos, Derek Bunn, and Afzal Siddiqui, 2014. "Optionality and Policymaking in Re-Transforming the British Power Market," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
  • Handle: RePEc:aen:eeepjl:eeep3_2_06bunn
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    Cited by:

    1. 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).

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    JEL classification:

    • F0 - International Economics - - General

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