Uncertainty and Energy Saving Investments

Matti Liski () and Pauli Murto

Working Papers from Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research

Abstract: Energy costs are notoriously uncertain but what is the effect of this on energysaving investments? We find that real-option frictions imply a novel equilibrium response to increasing but uncertain energy costs: early investments are cautious but ultimately real-option frictions endogenously vanish, and the activity affected by higher energy costs fully recovers. We use electricity market data for counterfactual analysis of the real-option mark-ups and policy experiments. Uncertainty alone implies that the early compensation to new technologies exceeds entry costs by multiple factors, and that uncertainty-reducing subsidies to green energy can benefit the consumer side at the expense of the old capital rents, even in the absence of externalities from energy use.

Date: 2010-03
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Persistent link: https://EconPapers.repec.org/RePEc:mee:wpaper:1005

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