Regulatory Uncertainty and Real Options in Switching of Electricity Peaking Generators

Seminario Applied

Stein-Erik Fleten (with M. Johansen, A. Pichler and C. J. Ullrich)

Norwegian University of Science and Technology

4-June-2018

Seminar 1 – 11:30

This paper examines empirically how regulatory uncertainty, strategic interactions and other factors affect managers decisions to switch between operating and stand-by states for peaking electric power generators. We use structural estimation, where the switching decisions are assumed to be governed by a real options model. We focus on the power markets in the Northeastern United States, where annual observations of such decisions are available. The results indicate that regulatory uncertainty significantly increases firms’ perception of switching costs.