New Renewable Electricity Capacity under Uncertainty: The Potential in Norway

Uncertainty affecting project values makes investors hesitate to build new capacity unless profitability is significant. When analysing the potential for new renewable capacity in a region, it is therefore necessary to properly capture both uncertainty effects and decision-making behaviour of investors. Important stochastic factors typically include wholesale electricity prices and certificate prices. We calculate trigger levels for the sum of these factors, and compare these with the current long-term contract prices to estimate the potential for new renewable electricity capacity. We take into account the cost and technical potential of small hydro and wind in Norway, the number of prenotifications, concession applications and grants, and the capacity targets of subsidising governmental bodies. With an electricity certificate policy target of 41 TWh per year new renewable for Sweden and Norway combined until 2016, we estimate that 12 TWh windpower and 6.2 TWh hydropower will be built in Norway. Due to the option value of waiting, most of this capacity will come after 2010