Assessing the effects of CO2 price caps on electricity investments—A real options analysis

Szolgayová, Jana; Fuss, Sabine; Obersteiner, Michael

doi:10.1016/j.enpol.2008.07.006

Cited by 102 publications

(52 citation statements)

References 17 publications

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“…Parameters used in the modelling of the electricity price are presented in Table 1. [14], a further investigation of the model also shows that it does not affect the direction of the results. e To avoid detracting from the main intent of this study the calculation of the required rate of return is not included.…”

Section: Modelmentioning

confidence: 99%

“…Numerous studies have attempted to assess the value associated with waiting to retrofit incumbent coal-fired generation with carbon capture and storage (CCS) technology in a pre-implementation mode [9,10,[14][15][16][17][18][19]. To the best of our knowledge CCS technology has not been established at a commercial scale, and so there is an additional uncertainty as to whether or not it will ever leave the research and development stage, which may not have been accounted for in the literature above.…”

Section: Introductionmentioning

confidence: 99%

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The effect of political cycles on power investment decisions: Expectations over the repeal and reinstatement of carbon policy mechanisms in Australia

Shahnazari¹,

McHugh²,

Maybee³

et al. 2014

Applied Energy

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Political uncertainty over global greenhouse gas (GHG) mitigation policy is likely to defer investment in cleaner technologies. It may also incentivise short-lived, high-cost interim investments while businesses wait for the uncertainty to subside. The range of possible policy responses to the issue has created uncertainty over the future of national mitigation pathways. Given that the electricity sector, globally, is a major emitter of GHGs, this represents a systematic risk to investment in electricity generation assets. This paper uses a real options analysis framework informed by a survey of experts conducted in Australia -used as a proxy to model the degree of the uncertainty-to investigate the optimal timing for investment in the conversion of a coal plant to a combined cycle gas turbine plant using the American-style option valuation method. The effect of market and political uncertainty is studied for the Clean Energy Act 2011 in Australia. Political uncertainty is addressed bimodally in terms of: (1) uncertainty over the repeal of the carbon pricing policy, and (2) if it is repealed, uncertainty over the reinstatement of the policy, to represent the effect of electoral cycles and the possibility of more stringent future global mitigation efforts. Results of the analysis show that although political uncertainty with respect to GHG mitigation policy may delay investment in the conversion of the coal plant, expectations over the reinstatement of the carbon pricing reduces the amount of option premium to defer the conversion decision.

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Section: Modelmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

The effect of political cycles on power investment decisions: Expectations over the repeal and reinstatement of carbon policy mechanisms in Australia

Shahnazari¹,

McHugh²,

Maybee³

et al. 2014

Applied Energy

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show abstract

“…Furthermore, we assume a constant load factor for each power plant, which especially for renewable technologies might lead to a small positive bias (see e.g. Reuter et al, 2012;Szolgayova et al, 2008). is the constant price of electricity, which the electricity producer earns per unit produced.…”

Section: Model Sectionmentioning

confidence: 99%

“…In a nutshell, we model a representative agent in the energy sector who owns an old coal-fired power plant (as representative for cheap power plants with high emissions as in Szolgayova et al, 2008). This power plant can but does not have to be replaced by a wind park -representing all renewable technologies with high investment costs but no emissions.…”

Section: Introductionmentioning

confidence: 99%

Permits vs. offsets under investment uncertainty

Koch

Reuter

Fuss

et al. 2017

Resource and Energy Economics

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“…Note that, while portfolio theory allows for a top-down view of the energy mix, the real options approach is more suited to represent decision-making at the plant and investment project level. Recent applications to energy investment include Madlener et al (2005), Fleten et al (2007), Laurikka and Koljonen (2006), Szolgayová et al (2008), Yang et al (2008), for which the use of real options approaches is practically limited by issues of computational practicality. See also Kann and Weyant (2000) on this topic.…”

Section: Box Real Options Theorymentioning

confidence: 99%

Technology Portfolios: Modelling Technological Uncertainty and Innovation Risks

Grübler¹,

Fuss²,

McCollum³

et al. 2013

Energy Technology Innovation

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AUTHORS' SUMMARYThe case study reviews a range of methodologies and model-based applications that can assist policy decisions under irreducible technology innovation uncertainties. One approach uses scenario analysis. A scenario study that explored a range of salient future uncertainties identified energy efficiency and conservation as the single most important and also most robust technology option for climate mitigation. Another approach uses portfolio theory to quantify the benefits from diversified technology portfolios in the framework of risk-averse decision-making. Such studies suggest risk aversion leads to higher adoption rates of currently higher-cost energy technology options such as modern biomass, renewables, and also carbon capture and storage (CCS). Diversification not only reduces the mean of risk exposure but also drastically lowers the tails of extreme undesirable outcomes. Portfolio theory and scenario analysis can also be combined, as illustrated by a study of three different energy system objectives (energy security, air pollution, climate change) within a multi-criteria optimization framework. Scenarios in which objectives were met individually, and then all together, under a range of uncertainties again demonstrated the benefits of portfolio diversification with greater emphasis on energy efficiency and "general purpose" energy conversion technologies. These examples discussed in this case study show that formal tools and approaches, including scenario analysis, portfolio theory, and multi-criteria optimization, are increasingly available to move technology portfolio decisions onto a more rational ground.

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Assessing the effects of CO2 price caps on electricity investments—A real options analysis

Cited by 102 publications

References 17 publications

The effect of political cycles on power investment decisions: Expectations over the repeal and reinstatement of carbon policy mechanisms in Australia

The effect of political cycles on power investment decisions: Expectations over the repeal and reinstatement of carbon policy mechanisms in Australia

Permits vs. offsets under investment uncertainty

Technology Portfolios: Modelling Technological Uncertainty and Innovation Risks

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