Environmental Impact Assessment and Investment under Uncertainty: An Application to Power Grid Interconnection

We consider a firm that must undergo a costly and time-consuming regulatory process before making an irreversible, lagged investment whose value varies randomly. We analyze two cases: regulatory approval is valid forever or it expires after some time. We apply our model to Hydro Québec's project of building a 1250 megawatts interconnection with Ontario. We find that the firm may start the regulatory process earlier if regulatory approval is valid long enough or if uncertainty is high enough; it postpones it otherwise. When to start the regulatory process and when to invest depend on the duration of the regulatory green light.
[ - ]
[ + ]