The experience curve, option value, and the energy paradox

Jasmin Ansar and Roger Sparks

Energy Policy, 2009, vol. 37, issue 3, 1012-1020

Abstract: This paper develops a model to explain the 'energy paradox,' the inclination of households and firms to require very high internal rates of return in order to make energy-saving investments. The model abstracts from many features of such investments to focus on their irreversibility, the uncertainty of their future payoff streams, and the investor's anticipation of future technological advance. In this setting, the decision to invest in energy-saving technology can be delayed, providing option value. In addition, delay allows the potential investor to cash in on future experience-curve effects: With the passage of time, firms gain practical knowledge in producing and installing the energy-saving technology, enabling them to reduce the technology's up-front cost per unit of energy saved. We incorporate these fundamentals into a stochastic model where the investment's discounted benefits follow geometric Brownian motion. To demonstrate the model's capabilities, we generate simulation results for photovoltaic systems that highlight the experience-curve effect as a fundamental reason why households and firms delay making energy-saving investments until internal rates of return exceed values of 50% and higher, consistent with observations in the economics literature. We also explore altruistic motivations for energy conservation and the model's implications for both "additionality" and the design of energy-conservation policy.

Keywords: Energy; paradox; Experience-curve; effects; Irreversible; investments (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0301-4215(08)00607-1
Full text for ScienceDirect subscribers only

Related works:
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:eee:enepol:v:37:y:2009:i:3:p:1012-1020

Access Statistics for this article

Energy Policy is currently edited by N. France

More articles in Energy Policy from Elsevier
Bibliographic data for series maintained by Catherine Liu ().