European Business Schools Librarian's Group

Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics

Investment under Uncertainty in Electricity Generation

Klaus Gugler (), Mario Liebensteiner (), Adhurim Haxhimusa () and Nora Schindler ()
Additional contact information
Klaus Gugler: Department of Economics and Research Institute for Regulatory Economics, Vienna University of Economics and Business
Mario Liebensteiner: Department of Economics, Vienna University of Economics and Business
Adhurim Haxhimusa: Research Institute for Regulatory Economics, Vienna University of Economics and Business
Nora Schindler: Department of Economics, Vienna University of Economics and Business

Abstract: The recent transformation of European electricity markets with increasing generation from intermittent renewables brings about many challenges. Among them, decaying wholesale prices, partly due to support schemes for renewables, may send insufficient investment signals for other technologies. We investigate the investment decision in a structural equation based on the Tobin’s q-model, which we extend by both industry- and firm-technology-specific uncertainty. We utilize rich and novel data at the disaggregated firm generation technology level of European electricity generating firms for the period 2006–2014. Our results show that investment in any generation technology follows market incentives despite sunk and irreversible capital, confirming the implications of the q-model. Moreover, while firm-technology-specific uncertainty decreases firms’ investment activity, especially in coal and gas, aggregate uncertainty triggers firms’ investment. Our results raise concerns about system reliability in the long run since conventional technologies still serve as a flexible system back-up.

Keywords: Tobin's q, Uncertainty, Investment, Electricity

JEL-codes: L22; L25; L51; Q48 September 2016

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