Taschini, Luca 
ORCID: 0000-0001-5355-1736 and Urech, Simon
(2010)
The real option to fuel switch in the presence of expected windfall profits under the EU Emission Trading Scheme.
Journal of Energy Markets.
ISSN 1756-3607
Abstract
This paper develops a simple model to evaluate the value and the activation frequencies of a generation system consisting of coal-fired and a gas-fired power plants using a real options approach, and the notions of clean-spark and clean-dark spreads. Under a cap-and-trade scheme, the use of emission permits represents an opportunity cost. In the energy industry different generation technologies produce different levels of CO2 emissions and, therefore, different opportunity costs. Addressing the question of how expected windfall profits affect the profitability of a generation plant and its activation frequencies, the paper shows that conventional findings are reversed. When the opportunity cost is internalized, the rate of activation of the gas plant decreases while that of the coal plant increases.
| Item Type: | Article |
|---|---|
| Official URL: | http://www.risk.net/type/technical-paper/source/jo... |
| Additional Information: | © 2010 Incisive Risk Information (IP) Limited |
| Divisions: | Grantham Research Institute |
| Subjects: | G Geography. Anthropology. Recreation > GE Environmental Sciences H Social Sciences > HA Statistics |
| JEL classification: | C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C13 - Estimation C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C15 - Statistical Simulation Methods; Monte Carlo Methods; Bootstrap Methods Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q4 - Energy > Q40 - General |
| Date Deposited: | 25 Jan 2016 11:25 |
| Last Modified: | 15 Sep 2023 14:10 |
| URI: | http://eprints.lse.ac.uk/id/eprint/65130 |
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