Sequential investment in gas fired power plants: A real options analysis
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This paper presents an empirical analysis of the real options to postpone and cancel sequential investments with time-to-build. Utilizing generator level data that to the best of our knowledge is unique in scope and detail, we look at investments in gas fired combustion and combined cycle generators. We find strong evidence of real option effects. Regulatory uncertainty and profit uncertainty increases the probability of companies postponing and canceling investments. Firms postponing during times of uncertainty is as expected from theory; firms canceling under these conditions is somewhat more surprising.