January 2010: The International Energy Agency (IEA) has released an information paper titled “The Economics of Transition in the Power Sector,” which analyzes the micro-economics of transitioning to cleaner power generation technologies to reduce carbon dioxide emissions, highlighting the importance of risk perception in investment decisions in the power sector.

The paper describes a case study of US coal power generation as a basis for its analysis of the micro-economics of decisions to refurbish vs. replace existing power plants to reduce carbon dioxide emissions by making them more efficient. The report notes that uncertainty over the future value of investments will be the main driver of decisions to refurbish rather than replace aging, inefficient plants. Therefore, it concludes that policies must be carefully designed to incentivize investments in new technologies, compensating firms not only for their high costs, but also for the risks involved in making the shift to new production methods.
The report also evaluates in which situations various price and non-price based mechanisms could be used to support the transition to low-carbon power generation technologies. [The Information Paper]