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Modeling Technology Adoption as an Irreversible Investment Under Uncertainty: The Case of the Turkish Electricity Supply Industry

  • Reinhard Madlener


    (Center for Energy Policy and Economics CEPE, Department of Management, Technology and Economics, ETH Zurich, Switzerland)

  • Gürkan Kumbaroglu


    (Department of Industrial Engineering, Bogaziçi University, 34342 Bebek, Istanbul, Turkey)

  • Volkan S. Ediger

    (Cumhurbaskanligi, Çankaya, TR-06689 Ankara, Turkey)

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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Paper provided by CEPE Center for Energy Policy and Economics, ETH Zurich in its series CEPE Working paper series with number 04-30.

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Length: 32 pages
Date of creation: Feb 2004
Date of revision:
Handle: RePEc:cee:wpcepe:04-30
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