Description

We investigate how to design energy systems which facilitate investments in renewable energy. In particular, we create models to investigate how a firm can optimally invest when the firm depends on government policy.  

Selected Results

Via an option-based model, Lavrutich et al. (2020) show how a welfare-maximizing planner interacts with private companies with conflicting objectives under uncertainty. They find that the planner cannot achieve social optimum under substantial market volatility, yet incentives can be aligned when the investment project cash flows are less risky.

Strategic decisions are in terms of production optimization is considered by Fleten et al. (2018). Specifically, they investigate the decisions to postpone, operate and cancel investment in gas-fired combustion and combined-cycle generators. They find that greater profitability uncertainty results in postponed projects which is consistent with real options theory. Furthermore, regulatory uncertainty can inhibit capacity growth as it increases the likelihood of cancelling and delaying power plant investments rather than completing the generator projects.

In the same line of work, Guerra et al. (2018) consider either to abandon or to mothball a project. Their results indicate that the two possibilities introduce a new price region of inaction where it is optimal to produce at a loss to gain more information. By incorporating competition,  Brøndbo et al. (2020) find that an increasing number of firms under imperfect competition induces greater installed capacity. In particular, their results suggest that imperfect competition may boost peak load investments at the expense of a loss in social welfare, mainly due to a substantial loss in consumer surplus.

Another important strategic consideration is whether to switch production when facing declining revenues. Støre et al. (2018) derive an optimal decision rule for when to switch from oil to gas production, which offers an important decision-support tool. This is especially pertinent with the current transition away from fossil cars, and, thus, reduced demand for oil.