Climate policy uncertainty and investment behaviour: Evidence from small hydropower plants
Dr Oecon Kristin Linnerud, Cicero In the coming years, Europe will need more electric power from renewable sources to meet our greenhouse gas and renewable targets. However, market and climate policy uncertainty affecting project cash flows could make investors hesitate to build new capacity unless profitability is significant. This follows from real option theory. Whether investors behave in accordance with this theory, is an empirical question. In Norway there are many good sites for small hydropower. Having access to such a site is viewed as holding a real option to invest. Using data from 225 small hydropower projects we study the investment behaviour of the developers. More specifically, we test whether investments did actually occur at the optimal point in time predicted by an option-based model. This is tested against the alternative hypothesis: that investments are made when the discounted value of future cash flows are equal to or exceeds investment outlays. Our investment models include two stochastic variables: wholesale electricity prices and green certificate prices. We calculate trigger levels for the sum of these prices, and compare these with Read more…
Categories: Academic Papers, Energy modelling, Energy policy, Finance and investment, Renewables
Tags: Climate change, conference 2010, Electricity generation, Energy in a Low carbon economy Europe, green certificates, Hydro, Norway, Pricing, Real options, Wholesale market
Climate policy uncertainty and investment behaviour - Presentation.pdf 756.55 KBSep
2010