Energy Technology R&D Portfolio Management: Modeling Uncertain Returns and Market Diffusion

36 Pages Posted: 22 Jun 2016

See all articles by John E. Bistline

John E. Bistline

Stanford University; Electric Power Research Institute

Date Written: June 2016

Abstract

The allocation of research and development (R&D) funds across a portfolio of programs must simultaneously consider uncertainty from research outcomes and from market acceptance of the resulting technologies. We introduce a stochastic R&D portfolio management framework for addressing both sources of uncertainty and present numerical results for energy technology R&D strategy under uncertainties in climate policy and natural gas prices. Numerical experiments indicate that R&D may be more valuable in second-best planning environments where decision-makers use expected-value approaches, and recourse investments occur after R&D has reduced costs. We also find that deterministic R&D valuation approaches likely overestimate the expected value of R&D success but undervalue the optionality and hedging potential of technologies relative to sequential decision-making approaches under uncertainty. The results also highlight the role of R&D in second-best policy environments.

Keywords: energy R&D; technological innovation; portfolio management; uncertainty

JEL Classification: O32; O33; Q41; Q42; Q48; C61

Suggested Citation

Bistline, John E. and Bistline, John E., Energy Technology R&D Portfolio Management: Modeling Uncertain Returns and Market Diffusion (June 2016). Available at SSRN: https://ssrn.com/abstract=2798481 or http://dx.doi.org/10.2139/ssrn.2798481

John E. Bistline (Contact Author)

Electric Power Research Institute ( email )

3412 Hillview Avenue
P.O. Box 10412
Palo Alto, CA 94304-1395
United States

HOME PAGE: http://eea.epri.com/

Stanford University ( email )

Stanford, CA 94305
United States

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