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Investment cost specifications revisited

Author

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  • Mier, Mathias
  • Azarova, Valeriya

Abstract

Policymakers often misjudge the results of technology-rich optimization models with high spatial and temporal resolutions, primarily due to variations in investment cost specifications. These models exhibit different sensitivities towards changing cost of capital (CoC) and discount rates. In this study, we utilize an intertemporally optimizing power market model to analyze three investment cost specifications, leading to distinct rates of adoption for specific generation technologies and diverging system cost, electricity prices, and carbon prices. The first specification assumes equity financing only, showcasing complete insensitivity to changing CoC. This specification promotes early wind power deployment and yields the lowest carbon prices. Conversely, the second specification, which involves a mix of equity and debt financing, demonstrates high sensitivity to changing CoC and postpones wind power deployment to later periods. The third specification, which assumes debt financing only, is insensitive to changing discount rates and generally results in the lowest investments and the highest carbon prices.

Suggested Citation

  • Mier, Mathias & Azarova, Valeriya, 2024. "Investment cost specifications revisited," Energy Policy, Elsevier, vol. 188(C).
    • Handle: RePEc:eee:enepol:v:188:y:2024:i:c:s0301421524000788
    DOI: 10.1016/j.enpol.2024.114058
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    More about this item

    Keywords

    Investment cost; Discounting; Cost of capital; Optimization model; Power market model;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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