The Economics of Transition in the Power Sector

This report discusses the economics of improving the energy efficiency of existing fossil fuel-powered power plants. The micro-economics of these upgrade investments can be important and can give additional insights into the potential costs and incentives required to stimulate an increase in power plant improvement investments. Consideration of investment risk typically causes companies to increase the return they require on investment. This means that the incentive mechanisms (e.g., increases in electricity prices or price signals provided by climate policies) required to stimulate the transition to a low-carbon system may need to be stronger than are implied by an equilibrium macro-economic analysis.