Keeping the Lights On Until the Regulator Makes Up His Mind!

Abstract

The purpose of this paper is to examine empirically the real options to shutdown, startup, and abandon existing production assets using detailed information for 1,121 individual power plants for the period 2001--2009, a total of 8,189 plant-year observations. We find strong evidence of real options effects. We find that uncertainty about the outcome of ongoing deregulation in retail electricity markets (i) decreases the probability of shutting down operating plants, and, (ii) decreases the probability of starting up plants which were previously shutdown.