Abstract
| Original language | English |
|---|---|
| Pages (from-to) | 1063-1074 |
| Number of pages | 12 |
| Journal | Energy Policy |
| Volume | 34 |
| Issue number | 9 |
| DOIs | |
| Publication status | Published - 2006 |
| MoE publication type | A1 Journal article-refereed |
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Keywords
- emission trading
- investment
- power generation
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Emissions trading and investment decisions in the power sector : A case study in Finland. / Laurikka, Harri (Corresponding Author); Koljonen, Tiina.
In: Energy Policy, Vol. 34, No. 9, 2006, p. 1063-1074.Research output: Contribution to journal › Article › Scientific › peer-review
TY - JOUR
T1 - Emissions trading and investment decisions in the power sector
T2 - A case study in Finland
AU - Laurikka, Harri
AU - Koljonen, Tiina
PY - 2006
Y1 - 2006
N2 - Organizations, which consider investment in or divestment of power production licences/capacity within the European Community, are exposed to the impacts of the European Union Emission allowance Trading Scheme (EU ETS). In this paper, the consequences of the EU ETS on investment decisions are explored in a country-specific setting in Finland. First, we review the general mechanisms through which the EU ETS influences size, timing and cashflows of an investment. Next, we discuss the projected changes in Finnish power producers’ investment environment and examine the financial impacts due to the EU ETS on a case investment decision, a hypothetical condensing power plant (250 MWe). The standard discounted cash flow (DCF) analysis is extended to take into account the value of two real options: the option to wait and the option to alter operating scale. In a quantitative investment appraisal, the impact of emissions trading not only depends on the expected level of allowance prices, but also on their volatility and correlation with electricity and fuel prices. The case study shows that the uncertainty regarding the allocation of emission allowances is critical in a quantitative investment appraisal of fossil fuel-fired power plants.
AB - Organizations, which consider investment in or divestment of power production licences/capacity within the European Community, are exposed to the impacts of the European Union Emission allowance Trading Scheme (EU ETS). In this paper, the consequences of the EU ETS on investment decisions are explored in a country-specific setting in Finland. First, we review the general mechanisms through which the EU ETS influences size, timing and cashflows of an investment. Next, we discuss the projected changes in Finnish power producers’ investment environment and examine the financial impacts due to the EU ETS on a case investment decision, a hypothetical condensing power plant (250 MWe). The standard discounted cash flow (DCF) analysis is extended to take into account the value of two real options: the option to wait and the option to alter operating scale. In a quantitative investment appraisal, the impact of emissions trading not only depends on the expected level of allowance prices, but also on their volatility and correlation with electricity and fuel prices. The case study shows that the uncertainty regarding the allocation of emission allowances is critical in a quantitative investment appraisal of fossil fuel-fired power plants.
KW - emission trading
KW - investment
KW - power generation
U2 - 10.1016/j.enpol.2004.09.004
DO - 10.1016/j.enpol.2004.09.004
M3 - Article
VL - 34
SP - 1063
EP - 1074
JO - Energy Policy
JF - Energy Policy
SN - 0301-4215
IS - 9
ER -