The effect of political cycles on power investment decisions: Expectations over the repeal and reinstatement of carbon policy mechanisms in Australia

M. Shahnazari; A. McHugh; B. Maybee; J. Whale

doi:10.1016/j.apenergy.2014.05.040

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The effect of political cycles on power investment decisions: Expectations over the repeal and reinstatement of carbon policy mechanisms in Australia

Journal article

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Peer reviewed

The effect of political cycles on power investment decisions: Expectations over the repeal and reinstatement of carbon policy mechanisms in Australia

M. Shahnazari, A. McHugh, B. Maybee and J. Whale

Applied Energy, Vol.130, pp.157-165

2014

DOI: https://doi.org/10.1016/j.apenergy.2014.05.040

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Abstract

Political uncertainty over global greenhouse gas (GHG) mitigation policy is likely to defer investment in cleaner technologies. It may also incentivise short-lived, high-cost interim investments while businesses wait for the uncertainty to subside. The range of possible policy responses to the issue has created uncertainty over the future of national mitigation pathways. Given that the electricity sector, globally, is a major emitter of GHGs, this represents a systematic risk to investment in electricity generation assets. This paper uses a real options analysis framework informed by a survey of experts conducted in Australia – used as a proxy to model the degree of the uncertainty – to investigate the optimal timing for investment in the conversion of a coal plant to a combined cycle gas turbine plant using the American-style option valuation method. The effect of market and political uncertainty is studied for the Clean Energy Act 2011 in Australia. Political uncertainty is addressed bi-modally in terms of: (1) uncertainty over the repeal of the carbon pricing policy, and (2) if it is repealed, uncertainty over the reinstatement of the policy, to represent the effect of electoral cycles and the possibility of more stringent future global mitigation efforts. Results of the analysis show that although political uncertainty with respect to GHG mitigation policy may delay investment in the conversion of the coal plant, expectations over the reinstatement of the carbon pricing reduces the amount of option premium to defer the conversion decision.

Details

Title: The effect of political cycles on power investment decisions: Expectations over the repeal and reinstatement of carbon policy mechanisms in Australia
Authors/Creators: M. Shahnazari (Author/Creator) - Murdoch University
A. McHugh (Author/Creator) - Murdoch University
B. Maybee (Author/Creator) - Curtin University
J. Whale (Author/Creator) - Murdoch University
Publication Details: Applied Energy, Vol.130, pp.157-165
Publisher: Elsevier B.V.
Identifiers: 991005541531007891
Copyright: © 2014 Elsevier Ltd.
Murdoch Affiliation: School of Engineering and Information Technology
Language: English
Resource Type: Journal article

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Collaboration types: Domestic collaboration
Citation topics: 6 Social Sciences; 6.115 Sustainability Science; 6.115.880 Renewable Energy Transition
Web Of Science research areas: Energy & Fuels; Engineering, Chemical
ESI research areas: Engineering