Modeling technology adoption as an irreversible investment under uncertainty: the case of the Turkish electricity supply industry

Abstract

This paper studies energy conversion technology adoption in the electricity supply sector from the perspective of irreversible investments under uncertainty and with a particular interest in environmental sustainability. We develop a dynamic technology adoption model that is firmly rooted in economic theory and that takes important determinants of optimal investment in available technologies (e.g., life cycle capital and operation cost) explicitly into account. Uncertainty is introduced for the demand for peak-load capacity, unit generation costs, and for the average electricity price. We test the model empirically by applying it to data for the Turkish power supply industry. The model-guided optimal investment schedule based on net present value considerations exhibits significant deviations from the actual investment outcome. We find that the increased adoption of natural-gas-fired power generation technologies in Turkey in recent years, while contributing to environmental sustainability, has had doubtful merits from an investor's perspective.