The cost of policy uncertainty in electric sector capacity planning: Implications for instrument choice

A stochastic energy system optimization model is developed to investigate capacity planning under policy uncertainty in the ERCOT area. The optimal hedging strategy under carbon tax uncertainty is to delay decarbonization, but an uncertain carbon cap or renewable portfolio standard precludes this approach. The cost of policy uncertainty is found to be higher under a carbon cap than a tax, and highest under an RPS. Uncertainty considerations appear to favor price-based over quantity-based instruments.