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Energy Transition Policy Options

The next step in the ongoing energy transition is investment in storage and electrolyzer capacity on an industrial scale. From an investors' perspective, these assets are particularly difficult to evaluate because on the one hand, their business model requires large electricity price fluctuations, while on the other hand, exactly these fluctuations increase uncertainty, against the background of transitioning from conventional power generation to a decarbonized state. We present a generalized setup for an optimal stopping problem which manages these uncertainties in a realistic setting and solve the trade-off between investment encouraging versus deferring effects. We get there in four steps: first, a stochastic model of the electricity market, based on its underlying drivers of supply and demand with their periodic trends, is developed. Second, with the help of studies on energy transition, realistic target states are defined in the form of several scenarios. Third, the resulting multi-dimensional optimal stopping problem is formulated in a generic way and adapted appropriately. Fourth, the numerical analysis of the dynamic programming problem is mastered. We can show that under a wide range of assumptions, although we find an even increasing volatility in the electricity price, the investment encouraging effect of price fluctuations largely keeps the upper hand over the investment-deferring effect of volatility. The consequence for energy policy making is that the investments can be stimulated mostly with the day-ahead market for electricity and do not, or to a lesser extent, require rigid, costly and competition distorting subsidy schemes.