Technology Assessment Reports

Date:

December 2006

Title:

TA 59 - Impact of Carbon Price Uncertainty of Investment in Selected Electricity Generation Options

Type:

Technology Assessments Report

Author(s):

Luke Reedman, Paul Graham, Peter Coombes, Doug Vincent

The present climate for investment in electricity generation assets in Australia is uncertain. The principle drivers of risk are the long-lived largely irreversible nature of electricity generation assets and the potential introduction of carbon prices on the emissions from generation at unknown levels in the future. If one assumes that carbon pricing already exists, then one could restate this last driver as the risk to a low emission technology investor that carbon prices will stay low and hence reduce the value of their investment.
This report employs a modified real options approach to examine investment under uncertainty. Using the existing literature as a guide on the possible values of future carbon prices, we use a different method to form estimates of the corresponding electricity and fuel prices. Instead of assuming that these variables follow simple stochastic processes we obtain projections for electricity and fuel prices from output of CSIRO’s Electricity Market Model (EMM) as inputs into the real options valuation.

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