Valuing Plug-In Hybrid Electric Vehicles’ Battery Capacity Using a Real Options Framework

Lemoine, Derek

doi:10.5547/issn0195-6574-ej-vol31-no2-5

Cited by 15 publications

(16 citation statements)

References 45 publications

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“…There may be additional arguments for supporting plug-in vehicles in the US, including the following: reducing the trade deficit by shifting from foreign to domestic fuel sources, enabling a distributed storage resource to balance intermittent renewable electricity (21), reducing oil revenues to states hostile to US interests (16), hedging against an anticipated oil-scarce or carbonconstrained future (22,23), improving regulatory control over emissions associated with poor vehicle maintenance (24), generating positive externalities by encouraging innovation (25), encouraging domestic development of strategic technical competency and intellectual property, manufacturing learning curve effects, reducing nonfinancial political and human suffering effects from war and political instability (18), and promoting international environmental justice. Quantification of these factors and estimates of life-cycle benefits of electrification would facilitate comparisons, and we encourage such analysis.…”

Section: Resultsmentioning

confidence: 99%

Valuation of plug-in vehicle life-cycle air emissions and oil displacement benefits

Michalek

Chester²,

Jaramillo

et al. 2011

Proc. Natl. Acad. Sci. U.S.A.

226

193

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We assess the economic value of life-cycle air emissions and oil consumption from conventional vehicles, hybrid-electric vehicles (HEVs), plug-in hybrid-electric vehicles (PHEVs), and battery electric vehicles in the US. We find that plug-in vehicles may reduce or increase externality costs relative to grid-independent HEVs, depending largely on greenhouse gas and SO 2 emissions produced during vehicle charging and battery manufacturing. However, even if future marginal damages from emissions of battery and electricity production drop dramatically, the damage reduction potential of plug-in vehicles remains small compared to ownership cost. As such, to offer a socially efficient approach to emissions and oil consumption reduction, lifetime cost of plug-in vehicles must be competitive with HEVs. Current subsidies intended to encourage sales of plug-in vehicles with large capacity battery packs exceed our externality estimates considerably, and taxes that optimally correct for externality damages would not close the gap in ownership cost. In contrast, HEVs and PHEVs with small battery packs reduce externality damages at low (or no) additional cost over their lifetime. Although large battery packs allow vehicles to travel longer distances using electricity instead of gasoline, large packs are more expensive, heavier, and more emissions intensive to produce, with lower utilization factors, greater charging infrastructure requirements, and life-cycle implications that are more sensitive to uncertain, time-sensitive, and location-specific factors. To reduce air emission and oil dependency impacts from passenger vehicles, strategies to promote adoption of HEVs and PHEVs with small battery packs offer more social benefits per dollar spent.T he electrification of passenger vehicles has the potential to address three of the most critical challenges of our time: plug-in vehicles may (i) produce fewer greenhouse gas (GHG) emissions when powered by electricity instead of gasoline, depending on the electricity source; (ii) reduce tailpipe emissions, which impact people and the environment; and (iii) reduce gasoline consumption, helping to diminish dependency on imported oil. Recognizing these benefits, US policymakers have provided federal tax credits of up to $7,500 per vehicle to encourage electrified transportation, with additional supporting policies enacted in many states (1, 2). Ideally, these policies would compensate for the externalities of energy use, such as damages to human health and to resources caused by emissions or oil consumption. Because such externality damages are not priced explicitly in the marketplace, they are not adequately accounted for in decision making, and users consume and emit more than they would have if they had born the full costs (3). Policymakers understand the impossibility of eliminating all externality damages; instead, laws favor determining which externality-reducing measures are worth paying for and which approaches reduce externality damages most efficiently.In this study we assess,...

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Section: Resultsmentioning

confidence: 99%

Valuation of plug-in vehicle life-cycle air emissions and oil displacement benefits

Michalek

Chester²,

Jaramillo

et al. 2011

Proc. Natl. Acad. Sci. U.S.A.

226

193

View full text Add to dashboard Cite

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“…Despite the extensive literature that illustrates the amenability of real options theory to the energy sector (Lemoine, 2010;Rothwell, 2006), analytical formulations of problems that address investment in RE projects typically do not combine crucial features such as policy uncertainty, discretion over capacity, or flexibility for stepwise investment. An empirical approach for analysing the impact of regulatory risk on investment in generation facilities is presented in Walls et al (2007).…”

Section: Related Workmentioning

confidence: 99%

“…By contrast, if the subsidy is not provided, then the firm will hold the value of a project in the absence of a subsidy. Given the likelihood of these two outcomes, the expected value of the active project under sudden provision of a retractable subsidy is described in (22). Notice that, compared to (18), the subsidy will be available for a smaller time period, and, therefore, its expected value is reduced, i.e., λ(1 − λ)y < λ y.…”

Section: Sudden Provision Of a Retractable Subsidymentioning

confidence: 99%

Stepwise Green Investment under Policy Uncertainty

Chronopoulos¹,

Hagspiel²,

Fleten³

2016

The Energy Journal

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We analyse how market price and policy uncertainty, in the form of random provision or retraction of a subsidy, interact to affect the optimal time of investment and the size of a renewable energy (RE) project that can be completed in either a single (lumpy investment) or multiple stages (stepwise investment). The subsidy takes the form of a fixed premium on top of the electricity price, and, therefore, investment is subject to electricity price uncertainty. We show that the risk of a permanent retraction (provision) of a subsidy increases (decreases) the incentive to invest, yet lowers (raises) the amount of installed capacity, and that this result is more pronounced as the size of the subsidy increases. Additionally, we show that increasing the number of policy interventions lowers the expected value of a subsidy and the size of the project. Furthermore, we illustrate that, although an increase in the size of a subsidy lowers the relative value of the stepwise investment strategy, the expected value of a lumpy investment strategy is still lower than that of stepwise investment.

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“…This characteristic affects the ability to hedge and thus the market for electricity is incomplete (Burger et al, 2004;Tsitakis and Yannacopoulos, 2006). The market price of risk may thus need to be incorporated into the Black-Scholes formula (Lemoine, 2009;Lyle and Elliott, 2009) and the SDE must be adjusted to account for this in the following way:…”

Section: Appendicesmentioning

confidence: 99%

Specifying An Efficient Renewable Energy Feed-in Tariff

Farrell¹,

Devine²,

Lee³

et al. 2017

The Energy Journal

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This paper derives efficient pricing formulae for renewable energy Feed-in Tariff (FiT) designs that incorporate exposure to uncertain market prices by using option pricing theory. Such FiT designs are presented as a means to delineate market price risk amongst investors and policymakers when designing renewable energy support schemes. Sequential game theory provides the theoretical framework through which we model the strategic interaction of policymakers and investors during policy formulation. This model is solved using option pricing theory when a FiT is comprised of market prices combined with a guaranteed element. This solution also allows for an analytical formulation of the policy cost of subsidisation. Partial derivatives characterise sensitivity of policy cost and investor remuneration to deviations in market conditions beyond those expected. Analytical derivations provide a set of tools which may guide more efficient FiT policy and investment decisions. Numerical simulations demonstrate application for a stylised Irish case study, with a scenario analysis providing further insight into the relative sensitivity of policy cost and investor remuneration under different market conditions.

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Valuing Plug-In Hybrid Electric Vehicles’ Battery Capacity Using a Real Options Framework

Cited by 15 publications

References 45 publications

Valuation of plug-in vehicle life-cycle air emissions and oil displacement benefits

Valuation of plug-in vehicle life-cycle air emissions and oil displacement benefits

Stepwise Green Investment under Policy Uncertainty

Specifying An Efficient Renewable Energy Feed-in Tariff

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