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Electric sector capacity planning under uncertainty: Climate policy and natural gas in the US

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  • Bistline, John E.

Abstract

This research investigates the dynamics of capacity planning and dispatch in the US electric power sector under a range of technological, economic, and policy-related uncertainties. Using a two-stage stochastic programming approach, model results suggest that the two most critical risks in the near-term planning process of the uncertainties considered here are natural gas prices and the stringency of climate policy. Stochastic strategies indicate that some near-term hedging from lower-cost wind and nuclear may occur but robustly demonstrate that delaying investment and waiting for more information can be optimal to avoid stranding capital-intensive assets. Hedging strategies protect against downside losses while retaining the option value of deferring irreversible commitments until more information is available about potentially lucrative market opportunities. These results are explained in terms of the optionality of investments in the electric power sector, leading to more general insights about uncertainty, learning, and irreversibility. The stochastic solution is especially valuable if decision-makers do not sufficiently account for the potential of climate constraints in future decades or if fuel price projections are outdated.

Suggested Citation

  • Bistline, John E., 2015. "Electric sector capacity planning under uncertainty: Climate policy and natural gas in the US," Energy Economics, Elsevier, vol. 51(C), pages 236-251.
  • Handle: RePEc:eee:eneeco:v:51:y:2015:i:c:p:236-251
    DOI: 10.1016/j.eneco.2015.07.008
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Healey, Stephen & Jaccard, Mark, 2016. "Abundant low-cost natural gas and deep GHG emissions reductions for the United States," Energy Policy, Elsevier, vol. 98(C), pages 241-253.
    2. 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.
    3. Hao Chen & Chi Kong Chyong & Jia-Ning Kang & Yi-Ming Wei, 2018. "Economic dispatch in the electricity sector in China: potential benefits and challenges ahead," Working Papers EPRG 1819, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    4. repec:spr:climat:v:144:y:2017:i:4:d:10.1007_s10584-017-2053-6 is not listed on IDEAS
    5. repec:eee:appene:v:233-234:y:2019:i::p:584-598 is not listed on IDEAS
    6. Bistline, John E. & Comello, Stephen D. & Sahoo, Anshuman, 2018. "Managerial flexibility in levelized cost measures: A framework for incorporating uncertainty in energy investment decisions," Energy, Elsevier, vol. 151(C), pages 211-225.
    7. repec:eee:rensus:v:80:y:2017:i:c:p:467-480 is not listed on IDEAS
    8. repec:eee:eneeco:v:74:y:2018:i:c:p:330-342 is not listed on IDEAS

    More about this item

    Keywords

    Electricity; Uncertainty; Stochastic programming; Climate policy; Risk management;

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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