Transition to Low-Carbon Electric Power: Portfolios, Flexibility, and Option Value

With the increased focus on responding to climate change by accelerating a transition to a low-carbon energy system, differing views remain on the combination of energy technologies that will best achieve this goal. Identifying technological pathways is complicated by wide uncertainties in economic and technological factors. Analyses that neglect these uncertainties can produce pathways for a low-carbon energy future that are highly granular and specific, but which are based on a particular assumption about future conditions and imply a need to make specific technology commitments over a long period of time. We frame the energy transition problem as the identification of one near-term investment strategy that is flexible across a wide range of possible future costs, followed by many alternative subsequent investment plans, each of which responds to realized future costs to achieve an aggressive emissions reduction target. Using an example of planning a low-carbon power system under uncertainty, we demonstrate the option value of not ruling out some energy technologies in the near term.