Modelling impacts of climate change policy uncertainty on power investment

Ming Yang () and William Blyth ()
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Ming Yang: Energy and Environment Division International Energy Agency
William Blyth: Oxford Energy Associates

A chapter in Economics and Management of Climate Change, 2008, pp 243-256 from Springer

Abstract: Abstract The changing electricity prices in competitive electricity markets, the uncertain carbon prices, and the increasing energy prices have forced power investors and government policy-makers to search for, and use, more sophisticated methods for project evaluations. The objective of this paper is to present a computer model currently developed by the International Energy Agency (IEA) to quantify the impacts of climate change policy uncertainties on power investment. The methodologies used include the traditional discounted cash flow approach to calculating project net present value, stochastic simulation to capture the characteristics of uncertain variables, and real option valuation to capture investors’ flexibility to optimize the timing of their investment. We applied these modelling methodologies in a case study to evaluate the effects of the changing carbon prices on firms’ decisions to invest in more energy efficiency power technologies. The study concludes that (1) the simulation of stochastic processes and real options could be very useful tools for power investors when dealing with uncertainties about future carbon prices; and (2) the more uncertain the primary energy prices and carbon trading prices, the more the economic case for lower emitting technologies deviates from the traditional discounted cash flow.

Keywords: Stochastic analysis; real option modelling; regulatory uncertainty; investment in energy efficiency technology (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-0-387-77353-7_18

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DOI: 10.1007/978-0-387-77353-7_18

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