Optimal Technology Choice and Investment Timing
- Working Paper
In this paper we develop an economic model that explains the decision-making problem under uncertainty of an industrial ¯rm that wants to invest in a process technology. More specifically, the decision is between making an irreversible investment in a combined heat-and-power production (cogeneration) system, or to invest in a conventional heat-only generation system (steam boiler) and to purchase all electricity from the grid. In our model we include the main economic and technical variables of the investment decision process. We also account for the risk and uncertainty inherent in volatile energy Prices that can greatly a®ect the valuation of the investment project. The dynamic stochastic model presented allows us to simultaneously determine the optimal technology choice and investment timing. We apply the theoretical model and illustrate our main findings with a numerical example that is based on realistic cost values for industrial oil- or gas-¯red cogeneration and heat-only generation in Switzerland. We also briefly discuss expected effects of a CO2 tax on the investment decision. Mehr anzeigen
Zeitschrift / SerieCEPE Working Paper
VerlagCEPE, Centre for Energy Policy and Economics, Swiss Federal Institute of Technology
ThemaCogeneration; Irreversible Investment; Risk; Uncertainty; Real options
Organisationseinheit03533 - Jochem, Eberhard
AnmerkungenFirst version December 2004, Revised version December 2006.