Investment in Water Conservation Technologies for Power Generation: A Real Options Approach
J. Rice, P. Chen, P. Adriaens
Ross School of Business, US
Keywords: hybrid cooling, turbines, global warming
Abstract:Global climate change is likely to impact the future geographic distribution of water, and drive emissions management policies. The uncertainties associated with water availability, policy frameworks and electricity pricing present a challenge to energy utilities to make investment decisions in water conservation technologies. Generally, firms require elasticity of energy pricing to be induced to invest in environmental technologies because they optimally would not want to commit to an irreversible investment that could turn out to be unprofitable in the event of a price and/or policy change. This paper will discuss and apply a real options framework to evaluate investment decisions in water-conserving technologies for power generation. Option values of technological investment in an uncertain policy environment (e.g. RPS; production tax credits; carbon markets; carbon taxes; power tariffs on water use) will be quantified and future circumstances will be identified under which the adoption of technology investment becomes potentially attractive to utilities.