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Investment opportunities, uncertainty, and renewables in European electricity markets

Author

Listed:
  • Gugler, Klaus
  • Haxhimusa, Adhurim
  • Liebensteiner, Mario
  • Schindler, Nora

Abstract

We investigate investment decisions in electricity generation technologies under uncertainty. The econometric analysis is based on a vast dataset of electricity generation capacities of virtually all European power plants, which we combine with disaggregated measures of investment opportunities and uncertainty. Our approach allows for a disaggregated analysis at the asset level (i.e. different electricity generation technologies) of the firm. Across technologies, we find investment to follow market incentives despite sunk and irreversible capital, confirming the implications of the Tobin's q-model. Asset-specific uncertainty hinders investment in conventional technologies, especially in peak-load assets, while industry uncertainty even triggers investment. Given that renewable power replaces peak-load generation technologies and that investment incentives decrease over time, our results indicate that there may be under-investment in the long run.

Suggested Citation

  • Gugler, Klaus & Haxhimusa, Adhurim & Liebensteiner, Mario & Schindler, Nora, 2020. "Investment opportunities, uncertainty, and renewables in European electricity markets," Energy Economics, Elsevier, vol. 85(C).
    • Handle: RePEc:eee:eneeco:v:85:y:2020:i:c:s0140988319303706
    DOI: 10.1016/j.eneco.2019.104575
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    Citations

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    Cited by:

    1. Liu, Liyun & Zhao, Zhenzhi & Zhang, Mingming & Zhou, Dequn, 2022. "Green investment efficiency in the Chinese energy sector: Overinvestment or underinvestment?," Energy Policy, Elsevier, vol. 160(C).
    2. Ishaya Tambari & Pierre Failler, 2020. "Determining If Oil Prices Significantly Affect Renewable Energy Investment in African Countries with Energy Security Concerns," Energies, MDPI, vol. 13(24), pages 1-21, December.
    3. Gugler, Klaus & Haxhimusa, Adhurim & Liebensteiner, Mario, 2021. "Effectiveness of climate policies: Carbon pricing vs. subsidizing renewables," Journal of Environmental Economics and Management, Elsevier, vol. 106(C).
    4. Lundin, Erik, 2022. "Geographic price granularity and investments in wind power: Evidence from a Swedish electricity market splitting reform," Energy Economics, Elsevier, vol. 113(C).
    5. Liu, Shuangquan & Xie, Mengfei, 2020. "Modeling the daily generation schedules in under-developed electricity markets with high-share renewables: A case study of Yunnan in China," Energy, Elsevier, vol. 201(C).
    6. Wei Cao & Martina Linnenluecke & Jinfang Tian & Rui Xue & Huan Yang, 2023. "How does investor attention affect energy firms' managerial opportunistic behavior? New evidence from China," Business Strategy and the Environment, Wiley Blackwell, vol. 32(7), pages 5025-5043, November.
    7. Haxhimusa, Adhurim & Liebensteiner, Mario, 2021. "Effects of electricity demand reductions under a carbon pricing regime on emissions: lessons from COVID-19," Energy Policy, Elsevier, vol. 156(C).
    8. Gugler, Klaus & Haxhimusa, Adhurim & Liebensteiner, Mario, 2023. "Carbon pricing and emissions: Causal effects of Britain's carbon tax," Energy Economics, Elsevier, vol. 121(C).
    9. Faria, João Ricardo & Tindall, Greg & Terjesen, Siri, 2022. "The Green Tobin's q: theory and evidence," Energy Economics, Elsevier, vol. 110(C).
    10. Simshauser, Paul, 2021. "Vertical integration, peaking plant commitments and the role of credit quality in energy-only markets," Energy Economics, Elsevier, vol. 104(C).
    11. Hemrit, Wael & Benlagha, Noureddine, 2021. "Does renewable energy index respond to the pandemic uncertainty?," Renewable Energy, Elsevier, vol. 177(C), pages 336-347.
    12. Liebensteiner, Mario & Haxhimusa, Adhurim & Naumann, Fabian, 2023. "Subsidized renewables’ adverse effect on energy storage and carbon pricing as a potential remedy," Renewable and Sustainable Energy Reviews, Elsevier, vol. 171(C).

    More about this item

    Keywords

    Electricity; Investment; Missing money; Uncertainty; Tobin's q;
    All these keywords.

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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