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Energy technology R&D portfolio management: Modeling uncertain returns and market diffusion

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  • Bistline, John E.

Abstract

The allocation of research and development (R&D) funds across a portfolio of programs must simultaneously consider uncertainty from research outcomes and from market acceptance of the resulting technologies. We introduce a stochastic R&D portfolio management framework for addressing both sources of uncertainty and present numerical results for energy technology R&D strategy under uncertainties in climate policy and natural gas prices. Numerical experiments indicate that R&D may be more valuable in second-best planning environments where decision-makers use expected-value approaches, and recourse investments occur after R&D has reduced costs. We also find that deterministic R&D valuation approaches likely overestimate the expected value of R&D success but undervalue the optionality and hedging potential of technologies relative to sequential decision-making approaches under uncertainty. The results also highlight the role of R&D in second-best policy environments.

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  • Bistline, John E., 2016. "Energy technology R&D portfolio management: Modeling uncertain returns and market diffusion," Applied Energy, Elsevier, vol. 183(C), pages 1181-1196.
    • Handle: RePEc:eee:appene:v:183:y:2016:i:c:p:1181-1196
    DOI: 10.1016/j.apenergy.2016.09.062
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