Skip to main content
SpringerLink
Log in

A case study on risk and return implications of emissions trading in power generation investments

  • Chapter
Emissions Trading

Abstract

This paper explores quantitative implications of the European Union Emissions Trading Scheme (EU ETS) on power capacity investment appraisal in a deregulated market. Risk and return of three different types of power plants, a gas-fired condensing power plant; a hydro power plant with a reservoir; and an off-shore wind power farm, are studied and compared in the regulatory environment of Finland. A single-firm exogenous and stochastic price model is used to simulate possible market outcomes. The model runs suggest that emissions trading increases the expected return of all three power plant technologies. The increase in risk is significant only in the case of the gas-fired power plant.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 89.00
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  • Awerbuch S (2000a) Getting it Right: The Real Cost Impacts of a Renewables Portfolio Standard. Public Utilities Fortnightly. Feb 15

    Google Scholar 

  • Awerbuch S (2000b) Investing in photovoltaics: risk, accounting, and the value of new technology. Energy Policy 28: 1023-1035

    Article  Google Scholar 

  • Awerbuch S (2004) Portfolio-Based Electricity Generation Planning: Implications for Renewables and Energy Security. Report for REEEP/UNEP. London, Paris

    Google Scholar 

  • Biello D (2004) Emissions boom for weather market. Environmental Finance October: 46

    Google Scholar 

  • Bolinger M, Wiser R, Golove W (2004) Accounting for fuel price risk when comparing renewable to gas-fired generation: the role of forward natural gas prices. Forthcoming in Energy Policy

    Google Scholar 

  • Dixit AK, Pindyck RS (1994) Investment under uncertainty. Princeton University Press. Princeton. New Jersey

    Google Scholar 

  • ECON (2004) Emissions trading and power prices. ECON report 2004-020. Project no 42100

    Google Scholar 

  • EPV, Etelä-Pohjanmaan Voima (2004) Press release 22.9.2004

    Google Scholar 

  • Electrowatt-Ekono (2003) Emissions trading and the Nordic electricity market. Report for the Ministry of Trade and Industry of Finland. Espoo

    Google Scholar 

  • Fatemi A, Luft C (2002) Corporate risk management – costs and benefits. Global Finance Journal 13: 29-38

    Article  Google Scholar 

  • Fleten S-E, Näsäkkälä E (2004) Gas Fired Power Plants: Investment Timing. Operating Flexibility and Abandonment. Working Paper 04-03. Department of Industrial Economics and Technology Management. Norwegian University of Science and Technology

    Google Scholar 

  • Froot KA, Scharfstein DS, Stein JC (1993) Risk Management: Coordinating Corporate Investment and Financing Policies. Journal of Finance vol 48 no 5: 1629-1658

    Article  Google Scholar 

  • Gustafsson J (2004) Valuation of Projects and Real Options in Incomplete Markets. Licentiate thesis. Systems Analysis Laboratory. Helsinki University of Technology

    Google Scholar 

  • Hoff TE, Herig C (1996) Strategic Planning in Electric Utilities: Using Renewable Energy Technologies as Risk Management Tools. 58th Annual Meeting of the American Power Conference. Chicago, Illinois. USA

    Google Scholar 

  • Holttinen H (2004) The Impact of Large-scale Wind Power Production on the Nordic Electricity System. Dissertation at the Helsinki University of Technology. VTT Publications 554. Espoo

    Google Scholar 

  • Hsu M (1998) Spark Spread Options are hot! Electricity Journal. March: 28-39

    Google Scholar 

  • IEA (International Energy Agency) (2003) Power Generation Investment in Electricity Markets. Paris

    Google Scholar 

  • IEA, International Energy Agency/NEA, Nuclear Energy Agency (2005) Projected costs of generating electricity – 2005 update. Paris

    Google Scholar 

  • Keppo J (2002) Optimality with Hydropower System. IEEE Transactions on Power Systems. vol 17 no 3: 583-589

    Article  Google Scholar 

  • Koljonen T, Kekkonen V, Lehtilä A, Hongisto M, Savolainen I (2004) The impacts of emissions trading in Finnish energy and metal industries. VTT Research Notes 2259 (In Finnish)

    Google Scholar 

  • Kymppivoima (2004) Press release 2.9.2004

    Google Scholar 

  • Laurikka H (2005) Option value of gasification technology within an emissions trading scheme. Working paper, Helsinki University of Technology

    Google Scholar 

  • Laurikka H, Koljonen T (2005) Emissions Trading and Investment Decisions in the Power Sector – a Case Study in Finland. Energy Policy (In press)

    Google Scholar 

  • Mayers D, Smith CW (1982) On the corporate demand for insurance. Journal of Business. vol 55 no 2: 281-296

    Google Scholar 

  • Moreira A, Rocha K, David P (2004) Thermopower generation investment in Brazil – economic conditions. Energy Policy 32: 91-100

    Article  Google Scholar 

  • Näsäkkälä E, Fleten S-E (2004) Flexibility and Technology Choice in Gas Fired Power Plant Investments. Paper presented in 8th annual Real Options Conference. June 17-19. Montréal. Canada

    Google Scholar 

  • PVO Engineering (2001) Kokkolan edustan merituulivoimalaitos – teknistaloudellinen raportti (In Finnish)

    Google Scholar 

  • Rebonato R, Jäckel P (1999) The most general methodology to create a valid correlation matrix for risk management and option pricing purposes. Natwest Group

    Google Scholar 

  • Ryden B (ed) (2003) Nordleden – Slutrapport för Etapp 2. Gothenburg. (In Swedish)

    Google Scholar 

  • Smekens KEL, Lako P, Seebregts, AJ (2003) Technologies and technology learning. contributions to IEA’s Energy Technology Perspectives. ECN-C-03-046

    Google Scholar 

  • Springer U, Varilek M (2004) Estimating the price of tradable permits for greenhouse gas emissions in 2008-2012. Energy Policy 32: 611-621

    Article  Google Scholar 

  • Tanlapco E, Lawarrée J, Liu C-C (2002) Hedging With Futures Contracts in a Deregulated Electricity Industry. IEEE Transactions on Power Systems. vol 17 no 3: 577-582

    Article  Google Scholar 

  • Teisberg EO (1995) Methods for evaluating capital investment decisions under uncertainty in Trigeorgis L (ed) Real options in capital investment – models. strategies and applications. Praeger. Westport. Connecticut

    Google Scholar 

  • Trigeorgis L (1995) Real options: an overview in Trigeorgis L (ed) Real options in capital investment – models, strategies and applications. Praeger. Westport. Connecticut

    Google Scholar 

  • Tseng C, Barz G (2002) Short-term generation asset valuation: a real options approach. Op. Res. 50(2): 297-310

    Article  Google Scholar 

  • Tufano (1996) Who manages risk? An empirical examination of risk management practices in the gold mining industry. The Journal of Finance vol 51(4): 1097-1137

    Google Scholar 

  • Vehviläinen I, Keppo J (2002) Managing Electricity Market Price Risk. European Journal of Operational Research vol 145 issue 1: 136-147

    Google Scholar 

  • Ventosa M, Baíllo Á, Ramos A, Rivier M (2005) Electricity market modeling trends. Energy Policy 33(7): 897-913

    Article  Google Scholar 

  • VTT Energy (2001) Energy visions for Finland 2030

    Google Scholar 

  • Weber C, Swider D (2004) Power plant investments under fuel and carbon price uncertainty. Paper presented at the 6th IAEE European Conference 2004 on Modeling in Energy Economics and Policy

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Laboratory of Energy Economics and Power Plant Engineering, Helsinki University of Technology, P.O. Box 4100, 02015 TKK, Finland

    Harri Laurikka

Authors
  1. Harri Laurikka
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Harri Laurikka .

Editor information

Editors and Affiliations

  1. University of Halle-Wittenberg, Halle, Germany

    Ralf Antes

  2. Helmholtzcentre for Environmental Research – UFZ, Leipzig, Germany

    Bernd Hansjürgens

  3. University of Siegen, Siegen, Germany

    Peter Letmathe

Rights and permissions

Reprints and permissions

Copyright information

© 2008 Springer Science+Business Media, LLC

About this chapter

Cite this chapter

Laurikka, H. (2008). A case study on risk and return implications of emissions trading in power generation investments. In: Antes, R., Hansjürgens, B., Letmathe, P. (eds) Emissions Trading. Springer, New York, NY. https://doi.org/10.1007/978-0-387-73653-2_9

Download citation

Publish with us

Policies and ethics

Search

Navigation