Infrastructure Investments Under Uncertainty with the Possibility of Retrofit: Theory and Simulations

63 Pages Posted: 20 Apr 2016

See all articles by Jon Strand

Jon Strand

World Bank

Sebastian Miller

Inter-American Development Bank (IDB)

Sauleh Siddiqui

Johns Hopkins University

Date Written: January 1, 2011

Abstract

Investments in large, long-lived, energy-intensive infrastructure investments using fossil fuels increase longer-term energy use and greenhouse gas emissions, unless the plant is shut down early or undergoes costly retrofit later. These investments will depend on expectations of retrofit costs and future energy costs, including energy cost increases from tighter controls on carbon emissions. Simulation analysis shows that the retrofit option can significantly reduce anticipated future energy consumption as of the time of initial investment, and total future energy plus retrofit costs. The more uncertain are the costs, the greater the value of this option. However, the future retrofit option also induces more energy-intensive infrastructure choices, partly offsetting the direct effect of having the option on anticipated energy use. Efficient, forward-looking infrastructure investments have high potential for reducing long-term energy consumption. Particularly if energy prices are expected to rise, however, the potential for reduced energy consumption will be eroded if expectations of energy prices do not include environmental costs or future retrofit possibilities and technologies are not adequately developed.

Keywords: Energy Production and Transportation, Climate Change Economics, Climate Change Mitigation and Green House Gases, Environment and Energy Efficiency, Energy and Environment

Suggested Citation

Strand, Jon and Miller, Sebastian and Siddiqui, Sauleh, Infrastructure Investments Under Uncertainty with the Possibility of Retrofit: Theory and Simulations (January 1, 2011). World Bank Policy Research Working Paper No. 5516. Available at SSRN: https://ssrn.com/abstract=1734617

Jon Strand (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Sebastian Miller

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Sauleh Siddiqui

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

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