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Environmental Impact Assessment and Investment under Uncertainty: An Application to Power Grid Interconnection

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  • Jean-Daniel Saphores
  • Éric Gravel
  • Jean-Thomas Bernard

Abstract

We consider a firm that must undergo a costly and time-consuming regulatory process before making an irreversible, lagged investment whose value varies randomly. We analyze two cases: regulatory approval is valid forever or it expires after some time. We apply our model to Hydro-Québec's project of building a 1250 megawatts interconnection with Ontario. We find that the firm may start the regulatory process earlier if regulatory approval is valid long enough or if uncertainty is high enough; it postpones it otherwise. When to start the reglulatory process and when to invest depend on the duration of the regulatory green light.
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Suggested Citation

  • Jean-Daniel Saphores & Éric Gravel & Jean-Thomas Bernard, 2003. "Environmental Impact Assessment and Investment under Uncertainty: An Application to Power Grid Interconnection," CIRANO Working Papers 2003s-29, CIRANO.
    • Handle: RePEc:cir:cirwor:2003s-29
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    References listed on IDEAS

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    More about this item

    Keywords

    regulation; uncertainty; irreversibility; real options; interconnections; réglementation; incertitude; irréversibilité; options réelles; interconnexions;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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