[Link Foundation Fellowship Final Report]
Barradale, Merrill Jones
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My research seeks to understand investment decision making in the electric power sector as it relates to wind energy and, ultimately, other forms of renewable energy, by investigating investor attitudes, preferences, and behavior. One strand of my research focuses on industry response to political uncertainty. One piece of this research addresses current policy incentives for wind energy. The primary source of current support for renewable energy, the federal production tax credit (PTC), typically gets renewed on a short-term basis (one to two years at a time), creating regular intervals of uncertainty about future policy. My research investigates the relationship between this uncertainty and the boom-bust cycle of wind plant investment. Another piece of this research focuses on uncertainty over future climate change policy. Ironically, as the debate over climate change has heated up over the past few years and legislation in the U.S. becomes increasingly likely, the fuel of choice in the electric power industry has shifted away from natural gas, a relatively clean fuel, and interest in coal plant development has surged. While logical with respect to current fuel prices (natural gas prices have risen and remained high, making coal attractive), this shift ignores the climate change debate. As a very carbon-intensive fossil fuel, coal would be strongly impacted by future carbon legislation, and yet current enthusiasm for coal plant development appears not to take this risk into consideration. My research investigates industry response to the logic of “carbon risk” (the risk that future carbon policy will have a negative financial impact on fossil fuel plants). A second strand of my research focuses on behavioral biases in financial decision making. One example is the “wishful expectations” bias, first observed by Ito (1990, AER 80(3): 434), who found that among people in the import-export business, views on future yen-dollar exchange rates correlated with whether they were on the import or export side of business, with expectations matching hope/self-interest. My research investigates similar biases in the energy sector between fuel price expectations and economic interests and between fuel development predictions and preferences. A third strand of my research, focused on valuing strategic opportunities in wind energy investment using a real options framework, is still under way.