Choice of nuclear power investments under price uncertainty: Valuing modularity

This work aims at examining how to compare two investment projects in the electricity market. The first project is a flexible sequence of small nuclear power plants, whereas the second is a nuclear power plant of large capacity. We measure the option value generated by the modularity of the first pr...

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Bibliographic Details
Published in:Energy economics 2005-07, Vol.27 (4), p.667-685
Main Authors: Gollier, Christian, Proult, David, Thais, Françoise, Walgenwitz, Gilles
Format: Article
Language:English
Subjects:
Applied sciences
Calibration
Economic data
Economic models
Electric energy
Electricity
Energy
Energy economics
Energy market
Exact sciences and technology
General, economic and professional studies
Investment
Market mechanisms
Methodology. Modelling
Modularity
Nuclear energy
Nuclear equipment
Nuclear power plants
Option value
Price instability
Sequential investment
Studies
Uncertainty
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Summary:This work aims at examining how to compare two investment projects in the electricity market. The first project is a flexible sequence of small nuclear power plants, whereas the second is a nuclear power plant of large capacity. We measure the option value generated by the modularity of the first project, given the uncertain future competitive price of electricity. Using a realistic calibration of the model, we show that the option value of modularity has a sizeable effect on the optimal dynamic strategy of the producer, in particular in terms of the optimal timing of the decision to invest in the first module.
ISSN:0140-9883
1873-6181
DOI:10.1016/j.eneco.2005.04.003