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Innovation and site quality: Implications for the timing of investments in renewable energy

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  • Conrad, Jon M.
  • Nøstbakken, Linda

Abstract

We study the optimal sequence of investment in renewable energy when technology improves over time and the productivity of deployed capital differs with site quality. Our perspective is that of a price- and technology-taking individual or firm. We begin with a model where the price of output produced with the technology is a known constant and technology improves according to a known differential equation. We specify an optimization problem that allows for the solution of the optimal date of initial investment and the dates for optimal replacement. We then develop models where output price evolves according to geometric Brownian motion and technology evolves deterministically or stochastically, with up-jumps (breakthroughs). The possibility of breakthroughs will further delay initial investment compared to the model where technology evolves deterministically. Our analysis is relevant for the initial investment in renewable energy (wind or solar) and determining when and where to replace capital that is inefficient relative to current technology.

Suggested Citation

  • Conrad, Jon M. & Nøstbakken, Linda, 2018. "Innovation and site quality: Implications for the timing of investments in renewable energy," Energy, Elsevier, vol. 148(C), pages 1173-1180.
  • Handle: RePEc:eee:energy:v:148:y:2018:i:c:p:1173-1180
    DOI: 10.1016/j.energy.2018.01.166
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    References listed on IDEAS

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    1. Huisman, Kuno J. M. & Kort, Peter M., 2004. "Strategic technology adoption taking into account future technological improvements: A real options approach," European Journal of Operational Research, Elsevier, vol. 159(3), pages 705-728, December.
    2. Pendharkar, Parag C., 2010. "Valuing interdependent multi-stage IT investments: A real options approach," European Journal of Operational Research, Elsevier, vol. 201(3), pages 847-859, March.
    3. Roger Adkins & Dean Paxson, 2016. "Subsidies for Renewable Energy Facilities under Uncertainty," Manchester School, University of Manchester, vol. 84(2), pages 222-250, March.
    4. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    5. Sendstad, Lars Hegnes & Chronopoulos, Michail, 2016. "Sequential Investment in Emerging Technologies under Policy Uncertainty," Discussion Papers 2016/10, Norwegian School of Economics, Department of Business and Management Science.
    6. Milliou, Chrysovalantou & Petrakis, Emmanuel, 2011. "Timing of technology adoption and product market competition," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 513-523, September.
    7. Eduardo S. Schwartz & Carlos Zozaya-Gorostiza, 2003. "Investment Under Uncertainty in Information Technology: Acquisition and Development Projects," Management Science, INFORMS, vol. 49(1), pages 57-70, January.
    8. Boomsma, Trine Krogh & Linnerud, Kristin, 2015. "Market and policy risk under different renewable electricity support schemes," Energy, Elsevier, vol. 89(C), pages 435-448.
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    Cited by:

    1. Chang, Kai & Wan, Qiong & Lou, Qichun & Chen, Yili & Wang, Weihong, 2020. "Green fiscal policy and firms’ investment efficiency: New insights into firm-level panel data from the renewable energy industry in China," Renewable Energy, Elsevier, vol. 151(C), pages 589-597.

    More about this item

    Keywords

    Sequential investment; Technological progress; Capital deployment; Investment in renewable energy; Wind power;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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