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On the evaluation of infrastructure investments: the case of electricity generation


  • Per-Olov JOHANSSON


  • Bengt KRISTRÖM





We derive general equilibrium cost-benefit rules for investment in a small power plant that needs (or does not need) carbon emission permits for production. Both atemporal and intertemporal models are considered, the latter showing e. g. that there exists a kind of option value also under certainty. Finally we introduce uncertainty by briefly discussing the concepts of quasi-option and option values and a switching possibility that is available for flexible power plants like hydropower ones which can easily be turned on and turned off.

Suggested Citation

  • Per-Olov JOHANSSON & Bengt KRISTRÖM & Kaj NYSTRÖM, 2009. "On the evaluation of infrastructure investments: the case of electricity generation," Departmental Working Papers 2009-24, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  • Handle: RePEc:mil:wpdepa:2009-24

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    References listed on IDEAS

    1. Dahl, Carol A., 1993. "A survey of energy demand elasticities in support of the development of the NEMS," MPRA Paper 13962, University Library of Munich, Germany.
    2. Bohringer, Christoph & Lange, Andreas, 2005. "On the design of optimal grandfathering schemes for emission allowances," European Economic Review, Elsevier, vol. 49(8), pages 2041-2055, November.
    3. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
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    More about this item


    Cost-benefit analysis; externalities; switching models;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General


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