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Optimal Power Investment and Pandemics: A Micro-Economic Analysis

Author

Listed:
  • Jerome Detemple

    (Department of Finance, Questrom School of Business, Boston University, 595 Commonwealth Avenue, Boston, MA 02215, USA
    These authors contributed equally to this work.)

  • Yerkin Kitapbayev

    (Department of Mathematics, North Carolina State University, 2311 Stinson Drive, Raleigh, NC 27695, USA
    These authors contributed equally to this work.)

Abstract

This paper derives the optimal investment policy of an electricity producer during a pandemic. We consider three problems: (1) investing in a gas-fired plant, (2) investing in a wind plant, and (3) investing in the best of a gas plant and a wind plant. Optimal investment boundaries are characterized and valuation formulas derived. For single technology projects, a pandemic postpones wind investment, but can accelerate gas investment when the relative price of gas decreases. For choices between the two technologies, a substitution effect can reinforce the single technology effects, accelerating gas investment under certain conditions. The paper examines the impact of pandemic parameters, economic parameters and policy parameters on the investment boundaries, the values of projects and the premium for green energy.

Suggested Citation

  • Jerome Detemple & Yerkin Kitapbayev, 2021. "Optimal Power Investment and Pandemics: A Micro-Economic Analysis," Energies, MDPI, vol. 14(4), pages 1-25, February.
    • Handle: RePEc:gam:jeners:v:14:y:2021:i:4:p:814-:d:492944
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    References listed on IDEAS

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    Cited by:

    1. Li Chen & Guang Zhang, 2022. "COVID-19 Effects on Arbitrage Trading in the Energy Market," Energies, MDPI, vol. 15(13), pages 1-13, June.

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