Dealing with deep uncertainty in the energy transition: What we can learn from the electricity and transportation sectors

Abstract

The energy transition requires substantial investments. However, deep uncertainty – a situation where probabilities of outcomes and possibly the outcomes themselves are unknown – can deter investment in the energy transition. This is demonstrated based on three cases covering the sectors power generation and transportation: investment in (i) a coal-fired power plant, (ii) offshore wind, and (iii) electric vehicles. These cases illustrate key issues related to deep uncertainty: The interplay of multiple sources of uncertainty within highly complex investments can lead to deep uncertainty. Further, deep uncertainty related to policy and technologies delays and distorts investment decision-making. Based on the findings from the cases, we derive recommendations for policymakers. In the case of technology uncertainties, the policymaker can widely support technology alternatives or offer risk mitigating instruments to reduce firms’ costs of making the wrong decision. Supporting highly uncertain early-stage investments yields additional social benefits by reducing uncertainty for future investments due to learning effects. Overall, policymakers need to signal credible long-term commitment to the energy transition, particularly in those cases, where policy itself is a major source of uncertainty for firms and investors.