Managerial Flexibility in Levelized Cost Measures: A Framework for Incorporating Uncertainty in Energy Investment Decisions
John Bistline,
Stephen D. Comello and
Anshuman Sahoo
Additional contact information
Stephen D. Comello: Stanford University
Anshuman Sahoo: Stanford University
Research Papers from Stanford University, Graduate School of Business
Abstract:
Many irreversible long-run capital investments entail opportunities for managers to respond flexibly to changes in the economic environment. However, common levelized cost measures used to guide decision-making, such as the levelized cost of electricity, implicitly assume that the values of random economic variables are known with certainty when investment decisions are made. This assumption implies, often incorrectly, that managerial flexibility carries zero value. This paper improves levelized cost measures by deriving an expansion that accounts for both uncertainties in relevant variables and the value of managerial flexibility in responding to them. This method is applied to quantify the value of flexibility in two example decision problems. In one, an operator of a natural gas electricity generation facility evaluates whether to invest in carbon capture capabilities. Another considers retirement decisions for U.S. nuclear plants. These examples illustrate that simplified cost metrics can inaccurately guide decision-making by inflating cost estimates relative to the proposed levelized cost measure that accounts for uncertainty and flexibility.
Date: 2017-08
New Economics Papers: this item is included in nep-ene, nep-env and nep-ppm
References: Add references at CitEc
Citations:
Downloads: (external link)
https://www.gsb.stanford.edu/gsb-cmis/gsb-cmis-download-auth/429161
Our link check indicates that this URL is bad, the error code is: 404 Not Found
Related works:
Journal Article: Managerial flexibility in levelized cost measures: A framework for incorporating uncertainty in energy investment decisions (2018) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:repec:ecl:stabus:3494
Access Statistics for this paper
More papers in Research Papers from Stanford University, Graduate School of Business Contact information at EDIRC.
Bibliographic data for series maintained by ().