Energy paradox and political intervention: A stochastic model for the case of electrical equipments

Omar Jridi, Maher Jridi, Saoussen Aguir Barguaoui and Fethi Zouheir Nouri

Energy Policy, 2016, vol. 93, issue C, 59-69

Abstract: This paper develops a model that explains the delay of decisions to adopt profitable energy-saving investments. This problem is known as the energy paradox. The model rationalizes the profitability requirements raised by the irreversibility, the uncertainty and the decrease of costs as a result of learning by doing. In this context, the wait gives investors more visibility and more lower investment costs, which gives them an option value. The representative agent has an interest to postpone its energy saving decision until future benefits increase and equalize its required option value. Formally, we internalize these explanatory factors in a stochastic model where the updated energy saving benefits follows a geometric Brownian motion. To affirm the capacity of the model, we generate simulation results for two equipments for electrical uses. Beyond that, we extend the model to simulate the effects of energy policy instruments to promote adoption of such equipments. Simulations prove that the taxation of energy prices is likely to be more effective than the subsidy for energy-saving equipments. It is also found that the combination of these instruments amplifies the adoption of energy-saving equipments and generates very favorable economic and environmental externalities.

Keywords: Hurdle rate; Option value; Energy efficiency gap; Experience curve; Stochastic model; Policy instrument (search for similar items in EconPapers)
JEL-codes: C5 O3 O38 Q2 R2 (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:93:y:2016:i:c:p:59-69

DOI: 10.1016/j.enpol.2016.02.046

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