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2003-04 Seminars


Investment in U.S. Electric Utilities under Regulation and Natural Gas Price Uncertainty: Timing of Plant Retirement and New Technology Choice

Peter Reinelt/Fredonia College and David Keith/CMU EPP

Abstract
Electric utility managers confront impending replacement of an aging coal generation fleet in a business environment characterized by volatile natural gas prices and uncertain future regulation of greenhouse gases and conventional pollutants. Generation technology choice and the timing of investment are examined with a stochastic dynamic programming model, which minimizes the present value of future power generation costs. Regulatory uncertainty combined with irreversible investment decisions creates an incentive to delay coal plant retirement with associated power generation cost and pollution consequences. The programming model provides a platform to examine these expected welfare loses arising from regulatory uncertainty. Conversely, irreversible investment prior to resolution of regulatory uncertainty can impact the effectiveness of eventual regulations.