Environmental Impact Assessment and Investment under Uncertainty: An Application to Power Grid Interconnection

Jean-Daniel Saphores, Éric Gravel and Jean-Thomas Bernard ()

CIRANO Working Papers from CIRANO

Abstract: We consider a firm that must undergo a costly and time-consuming regulatory process before making an irreversible, lagged investment whose value varies randomly. We analyze two cases: regulatory approval is valid forever or it expires after some time. We apply our model to Hydro Québec's project of building a 1250 megawatts interconnection with Ontario. We find that the firm may start the regulatory process earlier if regulatory approval is valid long enough or if uncertainty is high enough; it postpones it otherwise. When to start the regulatory process and when to invest depend on the duration of the regulatory green light. Nous considérons une firme qui doit se soumettre à un processus réglementaire long et coûteux avant de réaliser un investissement irréversible. La valeur de cet investissement est aléatoire et un délai de mise en service est nécessaire. Nous analysons deux cas : l'approbation réglementaire est toujours valide ou elle a une durée finie. Nous appliquons notre modèle à un projet d'Hydro Québec : la construction d'une interconnexion de 1250 mégawatts avec l'Ontario. Nous montrons que la firme débute le processus réglementaire plus tôt si l'approbation réglementaire est suffisamment longue ou si l'incertitude est assez élevée; autrement elle le retarde. Ces décisions dépendent aussi de la durée de l'approbation réglementaire.

Keywords: regulation; uncertainty; irreversibility; real options; interconnections; réglementation; incertitude; irréversibilité; options réelles; interconnexions (search for similar items in EconPapers)
JEL-codes: D81 L51 (search for similar items in EconPapers)
Date: 2003-05-01
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https://cirano.qc.ca/files/publications/2003s-29.pdf

Related works:
Working Paper: Environmental Impact Assessment and Investment under Uncertainty. An Application to Power Grid Interconnection (2003)
Working Paper: Environmental Impact Assessment and Investment under Uncertainty. An Application to Power Grid Interconnection (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:cir:cirwor:2003s-29

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