Optimal regulation of energy network expansion when costs are stochastic

Gijsbert Zwart

Journal of Economic Dynamics and Control, 2021, vol. 126, issue C

Abstract: We analyze optimal regulation of the gradual investments in energy networks necessary to accommodate the energy transition. We focus on a real option problem where costs of new network technology are stochastic and not observable to the regulator. We solve for the regulatory scheme that optimally balances timely investments with rent extraction in this dynamic agency context. We then apply this methodology to a situation in which investment can be either in traditional network technology, with observable costs, or using an innovative network technology for which there is asymmetric information on costs. The optimal choice trades off the potential benefits of cheaper expansion with the costs of overcoming information frictions.

Keywords: Adverse Selection; Dynamic contracting; Real option; Investment timing; Principal-Agent model; Regulation (search for similar items in EconPapers)
JEL-codes: D86 G31 L51 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:126:y:2021:i:c:s0165188920301135

DOI: 10.1016/j.jedc.2020.103945

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