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Investment under Uncertainty in Electricity Generation

Gugler, Klaus and Haxhimusa, Adhurim and Liebensteiner, Mario and Schindler, Nora (2016) Investment under Uncertainty in Electricity Generation. Department of Economics Working Paper Series, 234. WU Vienna University of Economics and Business, Vienna.

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Abstract

The recent transformation of European electricity markets with increasing generation from intermittent renewables brings about many challenges. Among them, decaying wholesale prices, partly due to support schemes for renewables, may send insufficient investment signals for other technologies. We investigate the investment decision in a structural equation based on the Tobin's q-model, which we extend by both industry- and firm-technology-specific uncertainty. We utilize rich and novel data at the disaggregated firm generation technology level of European electricity generating firms for the period 2006-2014. Our results show that investment in any generation technology follows market incentives despite sunk and irreversible capital, confirming the implications of the q-model. Moreover, while firm-technology-specific uncertainty decreases firms' investment activity, especially in coal and gas, aggregate uncertainty triggers firms' investment. Our results raise concerns about system reliability in the long run since conventional technologies still serve as a flexible system back-up. (authors' abstract)

Item Type: Paper
Keywords: Tobin's q / Uncertainty / Investment / Electricity
Classification Codes: JEL L22, L25, L51, Q48
Divisions: Departments > Volkswirtschaft
Depositing User: Claudia Tering-Raunig
Date Deposited: 19 Sep 2016 11:46
Last Modified: 13 Dec 2016 15:28
FIDES Link: https://bach.wu.ac.at/d/research/results/79285/
URI: http://epub.wu.ac.at/id/eprint/5177

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