Investment in clean energy technologies under uncertainty

Development of clean energy technologies is a necessity in order to reduce greenhouse gas emissions radically without imposing excessive costs. Substantial uncertainty about future prices and regulatory regimes make, however, such investments a risky ende avor. Yet, with huge uncertainties analysis of energy markets disregarding uncertainties may be seriously misleading. The purpose of the present project is therefore to study investment in clean energy technologies under uncertainty by developing a stocha stic energy market model. The model is then used to assess the impact of different energy and environmental policies on investment behavior, in particular how the design of optimal instruments are affected by uncertainty. In general, uncertainty will le ad investors to delay irreversible decisions to make use of future learning. Typically, investments in production capacity will decline (relative to the deterministic case). Uncertainty may, however, increase investments that enhance flexibility, such as investments in transmission capacity. Even if the effect on total investments may be modest, the impact may differ significantly across energy technologies, partly because the uncertainties differ, and partly because different technologies have differen t impacts on the overall system flexibility. Investments that enhance the overall system flexibility will have a higher social return than a pure deterministic evaluation would suggest. Because the impact on the overall system flexibility differs across technologies, a key issue is to assess how uncertainty affects different technologies differently. Deterministic and stochastic models will yield systematic different predictions, especially on investment decisions. When these models are used to evalua te different policy instruments, assessments may similarly be systematically different. An analysis of the impact of uncertainties about future policy is thus an important output from the project.