The effect of political cycles on power investment decisions: Expectations over the repeal and reinstatement of carbon policy mechanisms in Australia
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...
| Main Authors: | , , , |
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| Format: | Journal Article |
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Pergamon Press
2014
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| Online Access: | http://hdl.handle.net/20.500.11937/41424 |
| _version_ | 1848756142284472320 |
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| author | Shahnazari, M. McHugh, A. Maybee, Bryan Whale, J. |
| author_facet | Shahnazari, M. McHugh, A. Maybee, Bryan Whale, J. |
| author_sort | Shahnazari, M. |
| building | Curtin Institutional Repository |
| collection | Online Access |
| description | 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is addressed bi-modally in terms of: (1) uncertainty over the repeal of the carbon pricing policy, and (2) if it is repealed, uncertainty over the reinstatement of the policy, to represent the effect of electoral cycles and the possibility of more stringent future global mitigation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. |
| first_indexed | 2025-11-14T09:07:30Z |
| format | Journal Article |
| id | curtin-20.500.11937-41424 |
| institution | Curtin University Malaysia |
| institution_category | Local University |
| last_indexed | 2025-11-14T09:07:30Z |
| publishDate | 2014 |
| publisher | Pergamon Press |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | curtin-20.500.11937-414242017-09-13T14:13:03Z The effect of political cycles on power investment decisions: Expectations over the repeal and reinstatement of carbon policy mechanisms in Australia Shahnazari, M. McHugh, A. Maybee, Bryan Whale, J. Political cycles Uncertainty Real options Energy investment Australian climate policy 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 bi-modally 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. 2014 Journal Article http://hdl.handle.net/20.500.11937/41424 10.1016/j.apenergy.2014.05.040 Pergamon Press fulltext |
| spellingShingle | Political cycles Uncertainty Real options Energy investment Australian climate policy Shahnazari, M. McHugh, A. Maybee, Bryan Whale, J. The effect of political cycles on power investment decisions: Expectations over the repeal and reinstatement of carbon policy mechanisms in Australia |
| title | The effect of political cycles on power investment decisions: Expectations over the repeal and reinstatement of carbon policy mechanisms in Australia |
| title_full | The effect of political cycles on power investment decisions: Expectations over the repeal and reinstatement of carbon policy mechanisms in Australia |
| title_fullStr | The effect of political cycles on power investment decisions: Expectations over the repeal and reinstatement of carbon policy mechanisms in Australia |
| title_full_unstemmed | The effect of political cycles on power investment decisions: Expectations over the repeal and reinstatement of carbon policy mechanisms in Australia |
| title_short | The effect of political cycles on power investment decisions: Expectations over the repeal and reinstatement of carbon policy mechanisms in Australia |
| title_sort | effect of political cycles on power investment decisions: expectations over the repeal and reinstatement of carbon policy mechanisms in australia |
| topic | Political cycles Uncertainty Real options Energy investment Australian climate policy |
| url | http://hdl.handle.net/20.500.11937/41424 |