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We examine how regulatory uncertainty impacts the credit spreads of covered bonds issued by U.S. domiciled banks. Using data on covered bonds issued by Washington Mutual and Bank of America, for the September 2006 to December 2016 period, we find that investors require an incremental spread that equals approximately half of the credit spread on unsecured benchmark bonds as compensation for uncertainty about the legal status of covered bonds in the event of default. Systematic and other risk factors cannot explain the magnitude of the regulatory spread. We draw broader lessons on how investors impound regulatory outcomes into asset prices. [ABSTRACT FROM AUTHOR]

We present a real options model for capacity expansion that introduces uncertainty about potential future regulation (regulatory uncertainty) and key characteristics of capacity decisions: investment with time to build, divestment, the option to charter, and operating flexibility. Regulatory uncertainty is modelled as a possible jump in operating, investment, and charter costs during the simulation horizon. We find that regulatory uncertainty with grandfathering (the extant fleet is exempt from compliance) promotes high up-front investment leading to excess capacity and increased emissions. However, regulatory uncertainty without grandfathering reduces investment and emissions and the use of more flexible capacity options, such as chartering. [ABSTRACT FROM AUTHOR]

The European Union Emission Trading Scheme (EU ETS) – by far the largest in its kind-has inspired several other carbon markets in the world. Based on interviews with plant managers from almost all Belgian ceramics, lime and cement producers, this study describes how manager's perceptions on emission trading affected investment decisions. In line with behavioural economics, reference-dependence is found to explain why free allocation below emissions creates a greater incentive to abatement investment compared to allocation above emissions. In the ceramics sector, allocation above emissions refrained managers from including carbon gains in payback times. This contradicts the famous Coase theorem, which predicts that free allocation has no effect on abatement incentives. The results indicate that auctioning part of the emission rights will reduce barriers to abatement investment. Carbon price uncertainty is seen as a disincentive for abatement investment by some managers and as an incentive by others. Intermediate levels of uncertainty add option value to abatement investments because the associated gradual learning adds flexibility in an uncertain carbon constrained future. However, high levels of uncertainty, creating a risk of offshoring even when companies innovate, creates an option value to postpone abatement investments. Narrow framing, misperceiving the risk-hedging counter-cyclicality of carbon costs, reinforces the option value to wait. Therefore, policy should aim to reduce price uncertainty for very low and very high carbon prices, not for an intermediary price range. [ABSTRACT FROM AUTHOR]

Regulatory uncertainties have often posed a business risk to renewable energy investors. Energy regulations in Spain were recently revised in June 2014. The objective of this study is to analyze the 50 MW wind power project under revised framework. The project is evaluated using NPV with risk and real options method through Monte Carlo simulations. As a part of this study, five scenarios were evaluated. The base scenario, “Business As Usual (BAU)” consist of recent framework that was into place, just before the new regulation was announced. The other scenarios (including newly introduced framework) were compared to the BAU. We have focused on “delay” option for the current scope. The overall results of the study suggest a negative NPV under the revised framework, with significantly higher delay value. From the results, it is advisable to delay the project. The paper presents the policy implications under scenarios selected in the papers. The article also presents the policy implication for developing countries. The study also served as the learning for developing nations from European Union states. [ABSTRACT FROM AUTHOR]

Policy uncertainty can be a powerful deterrent to immediate investments. Based on panel data of 214 licenses to construct small run-of-the-river hydropower plants, we examine whether the prospect of a common Swedish–Norwegian market for green certificates (i.e., a renewable portfolio standard scheme) affected the timing of investments. Our results show that traditional utilities and other professional investors in the energy market acted in accordance with a real options investment rule, and the prospect of possible future subsidies delayed their investment decision. On the other hand, our results do not show that farmers and other non-professional investors incorporated timing considerations in their investment decisions. Rather, our results indicate that these investors behaved as if their investment opportunity is now-or-never, investing if the project is profitable according to a net present value investment rule, ignoring the opportunity to create additional value by waiting. The observed difference in behavior between professional and non-professional investors is interesting given the distributed nature of many renewable energy technologies, and can help planners and policymakers better understand the forces shaping the future market for electricity. [ABSTRACT FROM AUTHOR]

Abstract: This article studies the impact of regulatory uncertainty on an incumbent’s incentives to undertake the socially optimal investments in NGA networks. Thus, a regulatory non-commitment setting in which the regulator sets the access price after the deployment of the NGA network is used. In particular, it is assumed that the regulator sets the access price at the marginal cost of providing the access with some probability and gives an access markup, which equals the average cost of the investments, with the complementary probability. It is found that when the slope of the marginal investment cost function is not particularly steep in relation to the impact of investments on demand, the incumbent underinvests compared to the socially optimal investment level. On the contrary, in a more realistic case when the impact of investments on demand is low in relation to the slope of the marginal investment cost function, the incumbent may overinvest or underinvest depending on the probability of incorporating an access markup into the access price. [Copyright &y& Elsevier]

Abstract: A better understanding of corporate strategy under regulatory uncertainty enables policy makers to improve policy making efficiency and enhance regulations’ effectiveness. Based on a review of the literature on policy formulation, we propose that regulatory uncertainty is characterized by a dependence on political negotiation, a discrete scenario structure, and a discontinuous resolution. Data from a worldwide survey show that firms pursue response strategies to regulatory uncertainty that address these characteristics by participating in policy making and increasing strategic flexibility. Surprisingly, the results also show that regulatory uncertainty only partly causes firms to postpone strategic decisions. We find that existing regulation and a need to act quickly despite regulatory uncertainty are opposed to the pursuit of a postponement strategy. We conclude that improving the mechanisms by which firms participate in early stages of the policy making process could enable them to operate in a more target-oriented manner, allow for more efficient policy implementation, and increase a regulation''s effectiveness. [Copyright &y& Elsevier]

Abstract: Research on environmental uncertainty typically distinguishes between different sources of uncertainty according to the different environments that a company interacts with. The regulatory environment and associated uncertainties become especially important when investigating the subject of pollution reduction. Many researchers have started to investigate the effects of environmental regulation on innovation, however, only little is known about the role of regulatory uncertainty in this context. We provide a taxonomy of regulatory uncertainties by building on the Miles and Snow scale of environmental uncertainty. We apply this taxonomy to uncertainties in current climate policy and test it based on a survey among companies that are subject to the European Emission Trading Scheme (EU ETS), a flexible mechanism of the Kyoto-Protocol. Our results show that the EU ETS creates uncertainties in all categories of our taxonomy and suggest further research to better understand how different regulatory uncertainties affect companies’ business decisions. [Copyright &y& Elsevier]

Abstract: Investment opportunities in electric power generation have changed dramatically since electricity industry restructuring first began. In contrast to regulated utilities adding capacity in line with central planning and regulation, power plant investment is now more often made by independent companies who market power across multiple utility jurisdictions. Because the regulatory approval process is long and outcomes uncertain, developers often plan multiple options for a given development budget. As more information is revealed about the future prospects at different sites, options are abandoned sequentially until only projects that will be completed remain. In this paper we evaluate the decision to build new generation facilities in a changing and uncertain regulatory environment. We estimate hazard rates for new power plant projects using a database of generation projects in North America and examine in greater detail the development patterns in California and Texas, two states with very different regulatory regimes. We find that regulatory uncertainty significantly affects the pattern of development in the electric power generation industry. [Copyright &y& Elsevier]