Investment under Uncertainty in Electricity Generation

Klaus Gugler, Adhurim Haxhimusa, Mario Liebensteiner, Nora Schindler

Publication: Working/Discussion PaperWU Working Paper

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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.
Original languageEnglish
Publication statusPublished - 2016

Publication series

NameDepartment of Economics Working Paper Series
No.234

Austrian Classification of Fields of Science and Technology (ÖFOS)

  • 211
  • 502013 Industrial economics
  • 502034 Regulatory economics

WU Working Paper Series

  • Department of Economics Working Paper Series

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