Abstract:
Capacity expansion decisions are critically important to both public and private-sector energy suppliers as well as regional and national energy planning agencies. Simplistically stated, planning for the expansion of an energy supply system involves determining when and where new energy production facilities of various types and sizes should be deployed to meet projected demands. As with most energy-related decision problems, several factors complicate capacity expansion planning. These factors include the involvement of multiple decisionmakers and interest groups, uncertainties about technology costs and demand projections, varying degrees of risk associated with alternative energy technologies, the need to consider costs and effects over long time horizons, and the difficulty of quantifying key impacts and concerns.

Abstract:
Whether companies invest in new power facilities at a particular point in time, or delay, depends upon the perceived evolution of uncertainties and the investors' attitudes to risk and return. With additional risks emerging through climate change mitigation mechanisms, the propensity to invest may increasingly depend upon how each technology and company is exposed to carbon price uncertainty. We approach this by estimating the cumulative probabilities of investment over time in various technologies as a function of behavioral, policy, financial and market assumptions. Using a multistage stochastic optimization model with exogenous uncertainty in carbon price, we demonstrate that detailed financial analysis with real options and risk constraints can make substantial difference to the investment propensities compared to conventional economic analysis. Further, we show that the effects of different carbon policies and market instruments on these decision propensities depend on the characteristics of the companies and may induce market structure evolution.