Uncertainty and Energy Saving Investments
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,...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | en_US |
| Published: |
MIT Center for Energy and Environmental Research Policy
2010
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| Online Access: | http://hdl.handle.net/1721.1/54755 |
| _version_ | 1811081275959672832 |
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| author | Murto, Pauli Liski, Matti |
| author_facet | Murto, Pauli Liski, Matti |
| author_sort | Murto, Pauli |
| collection | MIT |
| description | 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. |
| first_indexed | 2024-09-23T11:44:10Z |
| format | Working Paper |
| id | mit-1721.1/54755 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T11:44:10Z |
| publishDate | 2010 |
| publisher | MIT Center for Energy and Environmental Research Policy |
| record_format | dspace |
| spelling | mit-1721.1/547552019-04-11T00:29:47Z Uncertainty and Energy Saving Investments Murto, Pauli Liski, Matti 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. Academy of Finland, Nordic Energy Research Program, and Yrj¨o Jahnsson Foundation 2010-05-11T15:45:12Z 2010-05-11T15:45:12Z 2010-03 Working Paper 2010-005 http://hdl.handle.net/1721.1/54755 en_US MIT-CEEPR (Series);10-005WP application/pdf MIT Center for Energy and Environmental Research Policy |
| spellingShingle | Murto, Pauli Liski, Matti Uncertainty and Energy Saving Investments |
| title | Uncertainty and Energy Saving Investments |
| title_full | Uncertainty and Energy Saving Investments |
| title_fullStr | Uncertainty and Energy Saving Investments |
| title_full_unstemmed | Uncertainty and Energy Saving Investments |
| title_short | Uncertainty and Energy Saving Investments |
| title_sort | uncertainty and energy saving investments |
| url | http://hdl.handle.net/1721.1/54755 |
| work_keys_str_mv | AT murtopauli uncertaintyandenergysavinginvestments AT liskimatti uncertaintyandenergysavinginvestments |