The purpose of this study is to analyze how market and policy uncertainties affect the general profitability of new investments in the power sector, and investigate the associated investment timing and technology choices. We develop an economic model for new investments in three competing energy technologies in the Swedish electric power sector. The model takes into account the policy impacts of the EU ETS and the Swedish green certificate scheme. By simulating and modeling policy effects through stochastic prices the results suggest that bio-fuelled power is the most profitable technology choice in the presence of existing policy instruments and under our assumptions. The likelihood of choosing gas power increases over time at the expense of wind power due to the relative capital requirement per unit of output for these technologies. Overall the results indicate that the economic incentives to postpone investments into the future are significant.
KeywordsBioenergyInvestmentRenewable EnergyElectricityWind Power
H. Laurikka and T. Koljonen, “Emissions Trading and Investment Decisions Power Sector—A Case Study in Finland,” Energy Policy, Vol. 34, No. 9, 2006, pp. 1063- 1074. doi:10.1016/j.enpol.2004.09.004
R. Madlener, G. Kumbaroglu and V. S. Ediger, “Modeling Technology Adoption as an Irreversible Investment Under Uncertainty: The Case of the Turkish Electricity Supply Industry,” Energy Economics, Vol. 27, No. 1, 2005, pp. 139-163. doi:10.1016/j.eneco.2004.10.007
F. Pettersson, “Power Generation Technology Choice in the Presence of Climate Policy,” Ph.D. Thesis, Lulea University of Technology, Lulea, 2005.
K. Venetsanos, P. Angelopoulou and T. Tsoutsos, “Renewable Energy Sources Project Appraisal under Uncer- tainty: The Case of Wind Energy Exploitation within a Changing Energy Market Environment,” Energy Policy, Vol. 30, No. 4, 2002, pp. 293-307. doi:10.1016/S0301-4215(01)00096-9
International Energy Agency (IEA), “Climate Policy Uncertainty and Investment Risk,” IEA, Paris, 2007.
M. C. Caramanis, R. E. Bohn and F. C. Schweppe, “System Security Control and Optimal Pricing of Electricity,” International Journal of Electrical Power & Energy Sys- tems, Vol. 9, No. 4, 1986, pp. 217-224. doi:10.1016/0142-0615(87)90003-2
M. C. Caramanis, R. E. Bohn and F. C. Schweppe, “Optimal Spot Pricing: Practice and Theory,” IEEE Transactions on Power Apparatus and Systems, Vol. 101, No. 9, 1982, pp. 3234-3245. doi:10.1109/TPAS.1982.317507
K. Neuhoff and L. De Vries, “Insufficient Incentives for Investments in Electricity Generations,” Utilities Policy, Vol. 12, No. 4, 2004, pp. 253-267. doi:10.1016/j.jup.2004.06.002
R. Green and D. M. Newbery, “Competition in the British Electricity Market,” Journal of Political Economy, Vol. 100, No. 5, 1992, pp. 929-953. doi:10.1086/261846
S. Borenstein, J. Bushnell and F. Wolak, “Diagnosing Market Power in California’s Restructured Wholesale Electricity Market,” The National Bureau of Economic Research Working Paper, No. 7868, 2000.
A. García-Díaz and P. L. Marín Uribe, “Strategic Bidding in Electricity Pools with Short-Lived Bids: An Application to the Spanish Market,” Energy Economics, Vol. 21, No. 2, 2003, pp. 201-222. doi:10.1016/S0167-7187(02)00040-1
N.-H. M. von der Fehr and D. C. Harbord, “Capacity Investment and Competition in Decentralised Electricity Markets,” University of Oslo, Oslo, 1997.
F. Castro-Rodriguez, P. L. Marín and G. Siotis, “Capacity Choices in Liberalized Electricity Markets,” Energy Policy, Vol. 33, No. 11, 2009, pp. 2547-2581. doi:10.1016/j.enpol.2009.01.038
L. Bird, M. Bolinger, T. Gagliano, R. Wiser, M. Brown and B. Parsons, “Policies and Market Factors Driving Wind Power Development in the United States,” Energy Policy, Vol. 33, No. 11, 2004, pp. 1397-1407. doi:10.1016/j.enpol.2003.12.018
D. C. Moody, “Ten Years of Experience with Deregulating US Power Markets,” Utilities Policy, Vol. 12, No. 3, 2004, pp. 127-137. doi:10.1016/j.jup.2004.04.008
P. S?derholm, K. Ek and M. Pettersson, “Wind Power Development in Sweden: Global Policies and Local Obstacles,” Renewable and Sustainable Energy Reviews, Vol. 11, No. 3, 2007, pp. 365-400. doi:10.1016/j.rser.2005.03.001
F. Roques, D. M. Newbery and W. J Nuttall, “Generation Adequacy and Investment Incentives in Britain: From the Pool to Neta,” Proceedings from the 3rd International Conference on Applied Infrastructure Research, Berlin, 9 October 2004.
S. Takizawa and A. Suzuki, “Analysis of the Decision to Invest for Constructing a Nuclear Power Plant Under Regulation of Electricity Price,” Decision Support Systems, Vol. 37, No. 3, 2004, pp. 449-456. doi:10.1016/S0167-9236(03)00045-9
J. H. Grobman and J. M Carey, “Price Caps and Investment: Long-Run Effects in the Electric Generation Indus- try,” Energy Policy, Vol. 29, No. 7, 2001, pp. 542-552. doi:10.1016/S0301-4215(00)00153-1
D. Finon, T. A. Johnsen and A. Midttun, “Challenges When Electricity Markets Face the Investment Phase,” Energy Policy, Vol. 32, No. 12, 2004, pp. 1355-1362. doi:10.1016/j.enpol.2003.12.017
A. Sandoff, “Akt?rernas Drivkrafter f?r Investeringar I Energisystemet,” Nordleden, G?teborg, 2003.
A. K. Dixit and R. S. Pindyck, “Investment under Uncertainty,” Princeton University Press, Princeton, 1994.
H. Laurikka, “Option Value of Gasification Technology Within an Emissions Trading Scheme,” Energy Policy, Vol. 34, No. 18, 2006, pp. 3916-3928. doi:10.1016/j.enpol.2005.09.002
R. Lundmark and F. Pettersson, “Dynamic Investment Decisions and Implementation of Climate Policies,” Proceedings of the 9th IAEE European Energy Conference— Energy Markets and Sustainability in a Larger Europe, Florence, 10-12 June 2007.
L. M. Abadie and J. M. Chamorro, “Valuing Flexibility: The Case of an Integrated Gasification Combined Cycle Power Plant,” Energy Economics, Vol. 30, No. 4, 2008, pp. 1850-1881. doi:10.1016/j.eneco.2006.10.004
S. Fuss, J. Szolgayova, M. Obersteiner and M. Gusti, “Investment under Market and Climate Policy Uncertainty,” Applied Energy, Vol. 85, No. 8, 2008, pp. 708- 721. doi:10.1016/j.apenergy.2008.01.005
M. Szolgayova, S. Fuss and M. Obersteiner, “Assessing the Effects of CO2 Price Caps on Electricity Investments— A Real Options Analysis,” Energy Policy, Vol. 36, No. 10, 2008, pp. 3974-3981. doi:10.1016/j.enpol.2008.07.006
M. Yang, W. Blyth, R. Bradley, D. Bunn, C. Clarke and T. Wilson, “Evaluating the Power Investment Options with Uncertainty in Climate Policy,” Energy Economics, Vol. 30, No. 4, 2008, pp. 1933-1950. doi:10.1016/j.eneco.2007.06.004
F. A. Roques, W. J. Nuttall and D. M. Newbery, “Nuclear Power: A Hedge against Uncertain Gas and Carbon Prices?” The Energy Journal, Vol. 27, No. 4, 2006, pp. 1- 23. doi:10.5547/ISSN0195-6574-EJ-Vol27-No4-1
Swedish Energy Agency, “Nytt Planeringsm?l f?r Vindkraften ?r 2020,” Swedish Energy Agency, Eskilstuna, 2007.
M. B?rring, O. Nystr?m, P.-A. Nilsson, F. Olsson, M. Egard and P. Jonsson, “El fr?n Nya Anl?ggningar 2003,” Elforsk, Stockholm, 2003.
J. Frayer and N. Z. Uludere, “What Is It Worth? Application of Real Options Theory to the Valuation of Generation Assets,” The Electricity Journal, Vol. 14, No. 8, 2001, pp. 40-51. doi:10.1016/S1040-6190(01)00237-8
J. J. Lucia and E. S. Schwartz, “Electricity Prices and Power Derivates: Evidence from the Nordic Power Exchange,” Review of Derivates Research, Vol. 5, No. 1, 2002, pp. 5-50. doi:10.1023/A:1013846631785
M. Slade, “Valuing Managerial Flexibility: An Application of Real-Option Theory to Mining Investments,” Journal of Environmental Economics and Management, Vol. 41, No. 2, 2001, pp. 193-233. doi:10.1006/jeem.2000.1139
W. J. Hahn and J. S. Dyer, “Discrete Time Modelling of Mean-Reverting Stochastic Processes for Real-Option Valuation,” European Journal of Operational Research, Vol. 184, No. 2, 2007, pp. 534-548. doi:10.1016/j.ejor.2006.11.015
G. Spangardt, M. Lucht, C. Wolf and C. Horn, “Decision Making in the Emissions-Market under Uncertainty,” In: R. Antes, B. Hansjurgens P. Lefmathe, Eds., Emissions trading and business, Physica-Verlag, Heidelberg, 2006.
S.-E. Fleten, K. M. Maribu and I. Wangensteen, “Optimal Investment Strategies in Decentralized Renewable Power Generation under Uncertainty,” Energy, Vol. 32, No. 5, 2007, pp. 803-815. doi:10.1016/j.energy.2006.04.015
International Energy Agency (IEA), “IEA Electricity Information,” Source OECD Database Edition, IEA/OECD, Paris, 2006.
Nord Pool, “Spot Market Data,” 2006. www.nordpool.no
Svenska Kraftn?t (SVK), “Green Certificates, Market Statistics,” 2008. https:// elcertifikat.svk.se/
P. J. Spinney and G. C. Watkins, “Monte Carlo Simulation Techniques and Electric Utility Resource Decisions,” Energy Policy, Vol. 24, No. 2, 1996, pp. 155-163. doi:10.1016/0301-4215(95)00094-1
D. C. Rode, P. S. Fischbeck and S. R. Dean, “Monte Carlo Methods for Appraisal and Valuation: A Case Study of a Nuclear Power Plant,” Journal of Structured and Project Finance, Vol. 7, No. 3, 2001, pp. 38-48. doi:10.3905/jsf.2001.320257
R. Green, “Carbon Tax or Carbon Permits: The Impact on Generators’ Risk,” The Energy Journal, Vol. 29, No. 3, 2008, pp. 67-89.
D. G. Williams, “Scenario Simulations Do Not Yield Results Stochastically Consistent with Alternative Monte Carlo Results: U.S. Nuclear Plant Decommissioning Funding Adequacy,” Energy Economics, Vol. 29, No. 5, 2007, pp. 1101-1130. doi:10.1016/j.eneco.2006.05.011
P. S?derholm and L. Str?mberg, “A Utility-Eye View of the CO2 Compliance-Decision Process in the European Power-Sector,” Applied Energy, Vol. 75, No. 3-4, 2003, pp. 183-192. doi:10.1016/S0306-2619(03)00031-X