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Modeling technology adoption as an irreversible investment under uncertainty: the case of the Turkish electricity supply industry

  • Madlener, Reinhard
  • Kumbaroglu, Gurkan
  • Ediger, Volkan S.

This paper studies energy conversion technology adoption in the electricity supply sector from the perspective of irreversible investments under uncertainty, and with a particular interest in environmental sustainability. We develop a dynamic technology adoption model that is firmly rooted in economic theory and that takes important determinants of optimal investment in available technologies (e.g. life-cycle capital and operation cost) explicitly into account. Uncertainty is introduced for the demand for peak-load capacity, unit generation costs, and for the average electricity price. We test the model empirically by applying it to data for the Turkish power supply industry. The model-guided optimal investment results based on net present value considerations exhibit significant deviations from the actual investment outcome. We find that the increased adoption of natural-gas-fired power generation technologies in Turkey in recent years, while contributing to environmental sustainability, has had doubtful merits from an investor’s perspective.

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Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 27 (2005)
Issue (Month): 1 (January)
Pages: 139-163

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Handle: RePEc:eee:eneeco:v:27:y:2005:i:1:p:139-163
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