Exploring the impact of boundedly rational power plant investment decision-making by applying prospect theory

In liberalized electricity markets, empirical findings suggest that power plant investment decision-making under uncertainty exhibits bounded rationality. This study leverages the Nobel-prize-winning theory - prospect theory - to evaluate the impact of various boundedly rational elements on electric power system transition. Results show that boundedly rational investment behavior renders higher uncertainties and higher system costs. Further analysis highlighted that reference dependence, a factor overlooked in existing studies, can dominate the system's evolution. In light of the presented results, it could be relevant for energy policy evaluation to consider, among others, the perspective and status of investors.

Automated summary

This study uses prospect theory, a Nobel-prize-winning theory, to assess the impact of bounded rationality on the transition of the electric power system. The findings indicate that bounded rational investment behavior leads to increased uncertainties and higher system costs. Moreover, the overlooked factor of reference dependence is found to dominate the system's evolution. Considering these results, it is important for energy policy evaluation to consider the perspectives and status of investors, among other factors.