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years and an interest rate of 10 % we can compute annuities of investment cost. Finally, the f r e e a l l o t m e n t o f C O 2 a l l o w a n c e s g r a n t e d t o n e w p o w e r p l a n t s r e s u l t s i n a d e f a c t o r e d u c t i o of the annuity by the net value of the allocated allowances. The resulting annual cost of investment for each technology are reported in table 1. In order to illustrate our theoretical findings we need to specify a continuous technology set which associates investment cost k to any level of production cost c. We do this by simply fitting a continuous function to the n

pairs c and k in table 1. We choose a simple hyperbolic functional form: k(c) =

p 2 c p 1

  • +

    p3

(least square fit yields: k(c) =

635.2 c0.47

34.5).

After solving for firms investment choices (compare theorems 1 2 and 3.) we obtain Industry investments for the scenarios analyzed. This is illustrated in figure 7. Only the

90

80

70

Marginal Cost of Production (E/MWh)

60

50

40

30

X

* M

X

*

  • =1/2

X

* EQ

(n=2)

X

*

  • =1/4

X

* EQ

(n=4)

X

* FB

20

10

  • 0

    10

20

30

40 50 60 Quantity/Investment X (GW)

70

80

90

100

F i g u r e 7 : I n d u s t r y I n v e s t m e n t f o r t h e d i ff e r e n t s c e n a r i o s X M ( c ) , X λ ( for Germany 2006. c ) , X E Q

( c ) , a n d X F B

(c)

case of strategic interaction is sensitive to the numbers of firms, the graph illustrates the case of 2 and 4 firms. The graph illustrates that the presence of market power also has a strong effect on firms investment choices. Most interestingly we observe a strong incentive

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