Optimal Technology Choice and Investment Timing: A Stochastic Model of Industrial Cogeneration vs. Heat-Only Production

In this paper we develop an economic model that explains the decision-making problem under uncertainty of an industrial firm 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 affect 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-fired cogeneration and heat-only generation in Switzerland. We also briefly discuss expected effects of a CO2 tax on the investment decision.Cogeneration, Irreversible investment, Risk, Uncertainty, Real options

The Economics of Adoption of Industrial Cogeneration: A Deterministic Model in Continuous Time

We conceptualize and model the decision-making problem of an industrial investor having the choice to adopt either some cogeneration or some heat-only generating technology, or a combination of the two. The deterministic model suggested is specified in continuous time, takes a lifetime perspective, and explicitly accounts for the impact of technical change and variations in other parameters on the optimal timing to adopt a cogeneration system and the optimal capacity choice/mix. The firm is flexible in postponing the investment decision. Uncertainty is incorporated by varying energy prices and base load duration. In a sensitivity analysis we show that the optimal capacity decision can change discontinuously due to regime shifts caused by changes in key variables, making investment decisions risky (risk of a suboptimal capacity choice) and optimal policy design very challenging. In numerical simulations, we provide evidence that technical progress and other changes in other important parameters can affect the optimal timing of adoption and the optimal capacity mix in important ways. Hence, if adopters are heterogeneous, this also has important implications on the optimal diffusion path of CHP technology. At the energy policy level, our findings of discrete jumps in the optimal cogeneration capacity level call for tailored cogeneration policies according to the specific characteristics of the firms, or industrial branches. At the more general level, the model could be useful for any kind of co-production where by-products can either be sold in the market or, alternatively, used as an input in some other production process of the firm concerned.Cogeneration; CHP; Technology adoption; Technical change

Economic impacts of a premature nuclear phase-out in Switzerland

This paper investigates the economic impacts of two policy proposals: "Strom ohne Atom" (SOA) and "Moratorium Plus" (MOP), both of which contain a premature phase-out of nuclear power in Switzerland. While MOP restricts business-as-usual operation time of existing nuclear power plants to 40 years, which results in a cutback of 10-20 years, SOA foresees a reduction in operation time of 20-30 years and administers combined heat and power to substitute for nuclear energy. Based on simulations with an intertemporal multi-sector general equilibrium model of the Swiss economy, we quantify the price tags for risk reduction from nuclear power operation given additional constraints on back-up technologies. Costs of accelerating the phase-out of nuclear power for an average household amount to 200 CHF/a over the next 45 years under SOA and drop to 60 CHF/a in the case of MOP. If Switzerland were to assure carbon neutrality of a premature phase-out by the use of carbon taxes, adjustment costs would increase to 230 CHF under SOA and 110 CHF under MOP. --nuclear phase-out,computable general equilibrium

Economic Impacts of a Premature Nuclear Phase-Out in Switzerland

This paper investigates the economic impacts of two policy proposals: "Strom ohne Atom" (SOA) and "Moratorium Plus" (MOP), both of which contain a premature phase-out of nuclear power in Switzerland. While MOP restricts business-as-usual operation time of existing nuclear power plants to 40 years, which results in a cutback of 10-20 years, SOA foresees a reduction in operation time of 20-30 years and administers combined heat and power to substitute for nuclear energy. Based onsimulations with an intertemporal multi-sector general equilibrium model of the Swiss economy, we quantify the price tags for risk reduction from nuclear power operation given additional constraints on back-up technologies. Costs of accelerating the phase-out of nuclear power for an average household amount to 200 CHF/a over the next 45 years under SOA and drop to 60 CHF/a in the case of MOP. If Switzerland were to assure carbon neutrality of a premature phase-out by the use of carbon taxes, adjustment costs would increase to 230 CHF under SOA and 110 CHF under MOP

Economie Impacts of a Premature Nuclear Phase-Out in Switzerland: An Applied General Equilibrium Analysis

This paper investigates the economic impacts of two policy proposals, "Strom ohne Atom" (SOA) and "Moratorium Plus" (MOP), both of which contain a premature phase-out of nuclear power in Switzerland. Based on simulations with an intertemporal multi-sector computable general equilibrium (CGE) model of the Swiss economy, we quantify the price tags for risk reduction from nuclear power operation given additional constraints on backup technologies and carbon neutrality. An important feature of the dynamic CGE model underlying our analysis is the bottom-up activity analysis representation of electricity generation in an otherwise top-down framework.nuclear phase-out; computable general equilibrium; activity analysis