Murdoch University Research Repository

Welcome to the Murdoch University Research Repository

The Murdoch University Research Repository is an open access digital collection of research
created by Murdoch University staff, researchers and postgraduate students.

Learn more

Power investment decisions under uncertain carbon policy: The effect of anticipated repeal and reinstatement of regulations

Shahnazari, M., McHugh, A., Maybee, B. and Whale, J.ORCID: 0000-0002-3130-5267 (2014) Power investment decisions under uncertain carbon policy: The effect of anticipated repeal and reinstatement of regulations. In: 18th Annual International Real Options Conference, 23 - 26 July, Medellin, Colombia

Free to read:
*No subscription required


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is addressed bimodally in terms of: (1) uncertainty over the repeal of the carbon pricing policy, and (2) if it is repealed, uncertainty over the reinstatement of the policy, to represent the effect of electoral cycles and the possibility of more stringent future global mitigation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.

Item Type: Conference Paper
Murdoch Affiliation(s): School of Engineering and Information Technology
Item Control Page Item Control Page


Downloads per month over past year