Investing in Energy Conversion Technologies - An Optimum Vintage Portfolio Selection Approach

The methods by which fuels can be converted into electricity all belong to different “technology families”: the “gas-fired-turbine-family”, the “coal-fired-turbine-family”, etc. Each family consists of different generations of similar technologies, as in a vintage model. Within a family, the latest generation embodies the most recent level and type of knowledge, becoming more and more outdated as new generations arrive. Producers face the problem how to compose their portfolio of families to minimize risk-adjusted costs of investment and production under a given demand constraint. Risk emanates from a number of uncertainties, such as volatile fuel prices and uncertain (prospects of) technological change. The paper presents a model capturing these features by integrating elements from financial Optimum Portfolio Theory (OPT) in a vintage capital investment framework. We find that the cumulative nature of embodied technical change gives rise to investment responses to (changes in) uncertainty that are in between the ‘standard’ results of OPT and Real Option Theory.economics of technology ;

Land Use Implications of Negative Emissions from BECCS

Even though current emissions still seem to be in a range consistent with many pathways stabilizing global temperature increase at 2°C, a look at the budgets left over to maintain warming well below 2°C or even 1.5°C reveals that the amount of greenhouse gases that is believed to still be safely accommodated in the atmosphere is being rapidly depleted. 2016 saw the disposal of another 36.4 Gt CO2 into the atmosphere only through burning of fossil fuels and industry (Le Quéré et al. 2016). In addition, those 2°C pathways feature large-scale deployment of certain technologies soon - something which we do not see materializing (e.g. van Noorden 2013). Amongst these technologies, one features especially importantly and that is carbon capture and storage (CCS), often combined with low-carbon bioenergy (BECCS) in order to enable removal of CO2 from the atmosphere (Fuss et al. 2014, 2016) and thus offset other emissions in the system that are difficult to quickly eliminate such as non-CO2 GHGs from agriculture. A vast literature has emerged on BECCS by now and is increasing exponentially (Minx et al., under review). This knowledge will need to be synthesized and made accessible for the IPCC’s special report on 1.5°C in order to inform the implementation of the Paris Agreement. The Integrated Assessment Models (IAMs), which have created the IPCC’s Fifth Assessment Report’s (AR5) stabilization pathways (Clarke et al. 2014), contain different BECCS technologies and different assumptions on the supply chains, e.g. where the biomass for the bioenergy is sourced from. Many do reach quite substantial shares of BECCS in primary energy though and this has led to concern that the land areas required to grow the additional biomass will be huge and that this might represent an impediment to fulfilling other sustainable development goals, e.g. eliminating hunger in the face of a growing population or safeguarding terrestrial ecosystems (e.g. Williamson 2016). This talk will shed light on the magnitudes of BECCS in the IPCC’s Fifth Assessment Report’s (AR5) scenarios and take stock of what we know and do not currently know about BECCS. It will specifically be focused on the land use implications (Smith et al. 2016) and discuss bioenergy potentials in the context of other demands on land. Finally, it will discuss possible entry points like the combination with CO2 utilization and close with a set of action items – for researchers and policy-makers. References Fuss, S. et al. (2014). Betting on negative emissions. Nature Climate Change 4: 850-853. Fuss, S. et al. (2016). Research priorities for negative emissions. Environmental Research Letters 11(11). Le Quéré et al. (2016). Global Carbon Budget 2016. Earth System Science Data, DOI:10.5194/essd-8-605-2016. Minx, J. et al. (under review). Fast growing research on negative emissions. Environmental Research Letters. Smith, P. et al. (2016). Biophysical and economic limits to negative CO2 emissions. Nature Climate Change, 6, 42-50. doi: 10.1038/nclimate2870.doi:10.1038/NCLIMATE2870. Van Noorden, R. (2013). Europe’s untamed carbon. Nature 493:141–142. Williamson, P. (2016). Emissions reduction: Scrutinize CO2 removal methods. Nature 530:153–155

Irreversible Investment under Uncertainty in Electricity Generation: A Clay-Clay-Vintage Portfolio Approach with an Application to Climate Change Policy in the UK

UK climate change policy has long been concerned with the transition to a more sustainable energy mix. The degree of competition in electricity markets rises as these markets become more and more liberalized. In order to survive in such an increasingly competitive setting, electricity producers have to handle as efficiently as possible the uncertainties associated with the volatility of fuel prices, but also uncertainties regarding the technological evolution of electricity production (including the development of renewable technologies). Technological uncertainty in combination with high capital costs are likely to deter investors from adopting renewable technologies on a larger scale than they are doing right now, even though they have to accept a higher degree of fuel price risk by doing so. By carefully composing a portfolio of technologies with different (co-)variances in the respective prices and rates of technical progress, risk-averse producers can effectively hedge the uncertainties mentioned above. In order to model this type of investment behaviour, we use an extended version of the van Zon and Fuss (2005) clay-clay-vintage-portfolio model that starts from the notion that investment in electricity production equipment is irreversible. However, a physical capital portfolio - in contrast to a portfolio of financial assets - can only be adjusted at the margin. This implies that it becomes extremely important to look ahead, and act on not just expectations themselves, but also their reliability. Using the extended model, we implement several features of present UK policy in order to illustrate the principles involved. We find that the reduction of risk goes together with an increase in total costs. We also find that for increasing values of risk-aversion, investors would be willing to adopt nuclear energy at earlier dates than otherwise would have been the case. In addition to this, we find that the embodiment of technical change, in combination with the expectation of a future switch towards another technology, may actually reduce current investment in that technology (while temporarily increasing current investment in competing technologies). The latter enables rational but risk-averse investors to maximise their productivity gain by waiting for ongoing embodied technical change to take place until the moment they plan to make the switch and then investing more heavily in the newest vintages associated with that technology at the time of the switch.Investment, Energy Industry, Electric Utilities, Technology, Mathematical Modelling, Environmental Policy, United Kingdom

The BECCS Implementation Gap–A Swedish Case Study

The IPCC has assessed a variety of pathways that could still lead to achievement of the ambitious climate targets set in the Paris Agreement. However, the longer time that climate action is delayed, the more the achievement of this goal will depend on Carbon Dioxide Removal (CDR) technologies and practices. In the models behind these pathways, the main CDR technology is Bioenergy combined with Carbon Capture and Storage (BECCS). We review the role that BECCS could play in reaching net-zero targets based on the existing 1.5\ub0C scenarios. Such scenarios presented in the literature typically have BECCS at a GtCO2 per year scale. We also assess the potentials and obstacles for BECCS implementation at the national level, applying Sweden as a case study. Given that BECCS deployment has scarcely started and, thus, is far from capturing 1 GtCO2 per year, with lead times on the scale of multiple years, we conclude that there will be a large implementation gap unless BECCS development is immediately intensified, emissions are reduced at a much faster pace or removals realized through other CDR measures. In the national case study, we show that Sweden has favorable conditions for BECCS in that it has large point sources of biogenic emissions, and that BECCS has been identified as one potential “supplementary measure” for reaching the Swedish target of net-zero emissions in 2045. Yet, work on planning for BECCS implementation has started only recently and would need to be accelerated to close the implementation gap between the present advancement and the targets for BECCS proposed in a recent public inquiry on the roles of supplementary measures. An assessment of two ramp-up scenarios for BECCS demonstrates that it should in principle be possible to reach the currently envisaged deployment scales, but this will require prompt introduction of political and economic incentives. The main barriers are thus not due to technological immaturity, but are rather of a socio-economic, political and institutional nature

Effects of Low-cost Offsets on Energy Investment -New Perspectives on REDD-

Tropical deforestation is one of the major sources of carbon emissions, but the Kyoto Protocol presently excludes avoiding these specific emissions to fulfill stabilization targets. Since the 13th Conference of the Parties (COP) to the UNFCCC in 2007, where the need for policy incentives for the reduction of emissions from deforestation and degradation (REDD) was first officially recognized, the focus of this debate has shifted to issues of implementation and methodology. One question is how REDD would be financed, which could be solved by integrating REDD credits into existing carbon markets. However, concern has been voiced regarding the effects that the availability of cheap REDD credits might have on energy investments and the development of clean technology. On the other hand, investors and producers are also worried that emissions trading schemes like the one installed in Europe might deter investment into new technologies and harm profits of existing plants due to fluctuations in the price of emissions permits. This paper seeks to contribute to this discussion by developing a real options model, where there is an option to invest in less carbon-intensive energy technology and an option to purchase credits on REDD, which you will exercise or not depending on the future evolution of CO2 prices. In this way, unresolved questions can still be addressed at a later stage, while producers and investors hold REDD options to maintain flexibility for later decisions. We find that investment in cleaner technology is not significantly affected if REDD options are priced as a derivative of CO2 permits. Indeed, the availability of REDD options helps to smooth out price fluctuations that might arise from permit trading and thus decreases risk for the producer - thereby being a complement to permit trading rather than an obstacle undermining cap-and-trade.Real Options, Energy Investment, Cap-And-Trade, REDD

Investment in Irrigation Systems under Weather Uncertainty

Irrigated agriculture will play a crucial role to meet future food demand, but a sustainable water resource management in agriculture is crucial as well. Therefore, the European Water Framework Directive promotes several measures, e.g., the adoption of adequate water pricing mechanisms or the promotion of water-saving irrigation techniques. Since production conditions such as weather and climate development are uncertain, farmers might be reluctant to invest in a water-saving but capital intensive irrigation system. We apply a stochastic dynamic programming approach to analyze a farmer’s optimal investment strategy for either a water–saving drip irrigation system or sprinkler irrigation system under weather uncertainty and assess the probability of adopting either irrigation system until the year 2040. We design two policy scenarios: (i) irrigation water pricing and (ii) equipment subsidies for drip irrigation, and investigate how they affect the farmer’s optimal investment strategy. Our case study analysis is performed for the region Marchfeld, a typical semi-arid agricultural production region in Austria. We use data from the bio-physical process simulation model EPIC (Environmental Policy Integrated Climate) which accounts for site and management related characteristics as well as weather parameters from a statistical climate change model. We find that investment in drip irrigation is unlikely unless subsidies for equipment cost are granted. Even water prices do not increase the probability to adopt a drip irrigation system, but rather decrease the probability to invest into either irrigation system.Irrigation investment, stochastic dynamic programming approach, water policies, weather uncertainty, EPIC, Farm Management, Risk and Uncertainty,

Large-Scale Modelling of Global Food Security and Adaptation under Crop Yield Uncertainty

Concerns about future food security in the face of volatile and potentially lower yields due to climate change have been at the heart of recent discussions on adaptation strategies in the agricultural sector. While there are a variety of studies trying to quantify the impact of climate change on yields, some of that literature also acknowledges the fact that these estimates are subject to substantial uncertainty. The question arises how such uncertainty will affect decision-making if ensuring food security is an explicit objective. Also, it will be important to establish, which options for adaptation are most promising in the face of volatile yields. The analysis is carried out using a stochastic version of the Global Biosphere Management Model (GLOBIOM) model, which is a global recursive dynamic partial equilibrium bottom-up model integrating the agricultural, bio-energy and forestry sectors with the aim to give policy advice on global issues concerning land use competition between the major land-based production sectors. The source of stochasticity is the interannual crop yield variability, making it more risky to rely on average yields and thus requiring stochastic optimization techniques. The results indicate that food security requires overproduction to meet minimum food supply constraints also in scenarios of negative yield shocks, where the additional land needed is sourced from forests and other natural land. Trade liberalization and enhanced irrigation both appear to be promising food supply stabilization, and hence land saving, mechanisms in the face of missing storage.food security, food price volatility, optimization under uncertainty, adaptation, land use change, Crop Production/Industries, Food Security and Poverty,

What influences the implementation of natural climate solutions? A systematic map and review of the evidence

Emergingresearch points to large greenhouse gas mitigation opportunities for activities that are focused on the preservation and maintenance of ecosystems, also known as natural climate solutions (NCS). Despite large quantifications of the potential biophysical and carbon benefits of these activities, these estimates hold large uncertainties and few capture the socio-economic bounds. Furthermore, the uptake of NCS remains slow and information on the enabling factors needed for successful implementation, co-benefits, and trade-offs of these activities remain underrepresented at scale. As such, we present a systematic review that synthesizes and maps the bottom-up evidence on the contextual factors that influence the implementation of NCS in the peer-reviewed literature. Drawing from a large global collection of (primarily case study-based, N = 211) research, this study (1) clarifies the definition of NCS, including in the context of nature-based solutions and other ecosystem-based approaches to addressing climate change; (2) provides an overview of the current state of literature, including research trends, opportunities, gaps, and biases; and (3) critically reflects on factors that may affect implementation in different geographies. We find that the content of the reviewed studies overwhelmingly focuses on tropical regions and activities in forest landscapes. We observe that implementation of NCS rely, not on one factor, but a suite of interlinked enabling factors. Specifically, engagement of indigenous peoples and local communities, performance-based finance, and technical assistance are important drivers of NCS implementation. While the broad categories of factors mentioned in the literature are similar across regions, the combination of factors and how and for whom they are taken up remains heterogeneous globally, and even within countries. Thus our results highlight the need to better understand what trends may be generalizable to inform best practices in policy discussions and where more nuance may be needed for interpreting research findings and applying them outside of their study contexts.Elsa-Neumann-Scholarship of the State of BerlinRESTORE+ project (http://www.restoreplus.org/), part of the International Climate Initiative, supported by the Federal Ministry for the Environment, Nature Conservation, and Nuclear Safety (BMU) on the basis of a decision adopted by the German BundestagPeer Reviewe

Evaluation of hydropower upgrade projects - a real options approach

When evaluating whether to refurbish existing hydropower plants or invest in a new power plant, there are two important aspects to take into consideration. These are the capacity chosen for the production facilities and the timing of the investment. This paper presents an investment decision support framework for hydropower producers with production facilities due for restoration. The producer can choose between refurbishing existing power plants and investing in a new production facility. A real options framework is proposed to support the investment decision. Using a case from Norsk Hydro ASA, a Norwegian hydropower producer, we employ the framework to evaluate the investment opportunities. Our main contribution is an approach that combines hydropower scheduling and real options valuation, and the results from our analysis suggest feasible investment strategies for Norsk Hydro ASA.Electricity price uncertainty; reservoir management; hydroelectric scheduling; investment under uncertainty; electricity markets