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More is better, or is it? Sizing portfolios of real investment options in the transition to net-zero emissions

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  • De Weerdt, Loïc

Abstract

We develop a framework to assess the relationship between a predefined portfolio of real investment options and the timing of investment. This framework is then applied to analyze the investment decision of a firm seeking to invest in a single technology for electricity generation with net-zero greenhouse gas emissions, while managing multiple investment options. Our results suggest that, in many cases, larger portfolio sizes do not impact the firm’s investment timing or may even lead to delayed investment. Furthermore, the framework allows us to identify, ex ante, the options the firm will never exercise. Consequently, we argue that expanding the portfolio with these options serves no purpose. Within this framework, we also estimate how the Inflation Reduction Act accelerates the firm’s investment timing. As an extension of our primary analysis, we propose an alternative policy design that promotes competition to further accelerate investment timing.

Suggested Citation

  • De Weerdt, Loïc, 2025. "More is better, or is it? Sizing portfolios of real investment options in the transition to net-zero emissions," Energy Economics, Elsevier, vol. 149(C).
    • Handle: RePEc:eee:eneeco:v:149:y:2025:i:c:s0140988325005584
    DOI: 10.1016/j.eneco.2025.108731
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    Keywords

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    JEL classification:

    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • P18 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Energy; Environment
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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