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Nuclear Power: A Hedge against Uncertain Gas and Carbon Prices?

  • Fabien A. Roques
  • William J. Nuttall
  • David M. Newbery
  • Richard de Neufville
  • Stephen Connors

High fossil fuel prices have rekindled interest in nuclear power. This paper identifies specific characteristics making nuclear power unattractive to merchant generators in liberalized electricity markets, and argues that non-fossil fuel technologies have an overlooked option value given fuel and carbon price uncertainty. Stochastic optimization estimates the company option value of keeping open the choice between nuclear and gas technologies. The merchant option value decreases sharply as the correlation between electricity, gas, and carbon prices rises, casting doubt on whether merchant investors have adequate incentives to choose socially efficient diversification in liberalized electricity markets.

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Article provided by International Association for Energy Economics in its journal The Energy Journal.

Volume (Year): Volume 27 (2006)
Issue (Month): Number 4 ()
Pages: 1-24

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Handle: RePEc:aen:journl:2006v27-04-a01
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  1. Murto, Pauli & Nese, Gjermund, 2002. "Input price risk and optimal timing of energy investment: choice between fossil- and biofuels," Working Papers in Economics 15/02, University of Bergen, Department of Economics.
  2. Shimon Awerbuch & Raphael Sauter, 2005. "Exploiting the Oil-GDP Effect to Support Renewables Deployment," SPRU Working Paper Series 129, SPRU - Science and Technology Policy Research, University of Sussex.
  3. Gollier, Christian & Proult, David & Thais, Françoise & Walgenwitz, Gilles, 2004. "Choice of Nuclear Power Investments ander Price Uncertainty: Valuing Modularity," IDEI Working Papers 270, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Pindyck, Robert S., 1993. "Investments of uncertain cost," Journal of Financial Economics, Elsevier, vol. 34(1), pages 53-76, August.
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  6. Bar-Ilan, Avner & Strange, William C, 1996. "Investment Lags," American Economic Review, American Economic Association, vol. 86(3), pages 610-22, June.
  7. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
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