Uncertainty and Energy Saving Investments
Name
2010-005.pdf
Size
315.95 KB
Format
Adobe PDF
Checksum (MD5)
b5a58b84574b8110083240dad2b38b11
Author(s)
Murto, Pauli
Liski, Matti
Date Issued
March 2010
Publisher
MIT Center for Energy and Environmental Research Policy
Series/Report no.
MIT-CEEPR (Series);10-005WP
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.
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