How to proceed with competing alternative energy technologies: A real options analysis
Concerns about CO2 emissions create incentives for the development and deployment of energy technologies that do not use fossil fuels. Indeed, such technologies would provide tangible benefits in terms of avoided fossil-fuel costs, which are likely to increase as restrictions on CO2 emissions are imposed. However, a number of challenges need to be overcome prior to market deployment, and the commercialisation of alternative energy technologies may require a staged approach given price and technical risk. We analyse how a firm may proceed with staged commercialisation and deployment of competing alternative energy technologies. An unconventional new alternative technology is one possibility, where one could undertake cost-reducing production enhancement measures as an intermediate step prior to deployment. By contrast, the firm could choose to deploy a smaller-scale existing renewable energy technology, and, using the real options framework, we compare the two projects to provide managerial implications on how one might proceed.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Décamps, Jean-Paul & Mariotti, Thomas & Villeneuve, Stéphane, 2003.
"Irreversible Investment in Alternative Projects,"
IDEI Working Papers
193, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jul 2004.
- 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.
- Gollier, Christian & Proult, David & Thais, Francoise & Walgenwitz, Gilles, 2005. "Choice of nuclear power investments under price uncertainty: Valuing modularity," Energy Economics, Elsevier, vol. 27(4), pages 667-685, July.
- Gollier, Christian, 2004. "Choice of Nuclear Power Investments under Price Uncertainty: Valuing Modularity," IDEI Working Papers 287, Institut d'Économie Industrielle (IDEI), Toulouse.
- Geoffrey Rothwell, 2006. "A Real Options Approach to Evaluating New Nuclear Power Plants," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 87-54.
- Robert S. Pindyck, 1992.
"Investments of Uncertain Cost,"
NBER Working Papers
4175, National Bureau of Economic Research, Inc.
- G. Rothwell, 2007. "Managing Advanced Technology System Deployment: An Optimal Allocation Between R&D And Prototype Funding," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 16(6), pages 419-432.
- Siddiqui, Afzal S. & Marnay, Chris & Wiser, Ryan H., 2007. "Real options valuation of US federal renewable energy research, development, demonstration, and deployment," Energy Policy, Elsevier, vol. 35(1), pages 265-279, January.
- Roberts, Kevin & Weitzman, Martin L, 1981.
"Funding Criteria for Research, Development, and Exploration Projects,"
Econometric Society, vol. 49(5), pages 1261-88, September.
- M. L. Weitzman & K. Roberts, 1979. "Funding Criteria for Research, Development and Exploration Projects," Working papers 234, Massachusetts Institute of Technology (MIT), Department of Economics.
- Malchow-Moller, Nikolaj & Thorsen, Bo Jellesmark, 2005. "Repeated real options: optimal investment behaviour and a good rule of thumb," Journal of Economic Dynamics and Control, Elsevier, vol. 29(6), pages 1025-1041, June.
- Grenadier, Steven R. & Weiss, Allen M., 1997. "Investment in technological innovations: An option pricing approach," Journal of Financial Economics, Elsevier, vol. 44(3), pages 397-416, June.
- Schwartz, Eduardo, 1998. "Valuing long-term commodity assets," Journal of Energy Finance & Development, Elsevier, vol. 3(2), pages 85-99.
- Kobos, Peter H. & Erickson, Jon D. & Drennen, Thomas E., 2006. "Technological learning and renewable energy costs: implications for US renewable energy policy," Energy Policy, Elsevier, vol. 34(13), pages 1645-1658, September.
- Dixit, Avinash, 1993. "Choosing among alternative discrete investment projects under uncertainty," Economics Letters, Elsevier, vol. 41(3), pages 265-268.
- Davis, Graham A. & Owens, Brandon, 2003. "Optimizing the level of renewable electric R&D expenditures using real options analysis," Energy Policy, Elsevier, vol. 31(15), pages 1589-1608, December.
- Goetz, Renan-Ulrich & Hritonenko, Natali & Yatsenko, Yuri, 2008. "The optimal economic lifetime of vintage capital in the presence of operating costs, technological progress, and learning," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 3032-3053, September.
- Eduardo S. Schwartz, 1998. "Valuing Long-Term Commodity Assets," Financial Management, Financial Management Association, vol. 27(1), Spring.
- Fleten, S.-E. & Maribu, K.M. & Wangensteen, I., 2007.
"Optimal investment strategies in decentralized renewable power generation under uncertainty,"
Elsevier, vol. 32(5), pages 803-815.
- Fleten, Stein-Erik & Maribu, Karl Magnus & Wangensteen, Ivar, 2005. "Optimal investment strategies in decentralized renewable power generation under uncertainty," MPRA Paper 218, University Library of Munich, Germany, revised Jun 2006.
When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:32:y:2010:i:4:p:817-830. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If references are entirely missing, you can add them using this form.