Wind Turbine Shutdowns and Upgrades in Denmark: Timing Decisions and the Impact of Government Policy

Abstract

Shutting down and/or upgrading existing productive assets are important economic decisions for the owners of those assets and are also the fundamental decisions that underlie the development of new, growing industries. This paper develops a dynamic structural econometric model of wind turbine owners' decisions about whether and when to add new turbines to a pre-existing stock, scrap an existing turbine, or replace old turbines with newer versions (i.e., upgrade). We apply our model to owner-level panel data for Denmark over the period 1980-2011 to estimate the underlying profit structure for wind producers and evaluate the impact of technology and government policy on wind industry development. Our structural econometric model explicitly takes into account the dynamics and interdependence of shutdown and upgrade decisions and generates parameter estimates with direct economic interpretations. Results from the model indicate that the growth and development of the Danish wind industry was primarily driven by government policies as opposed to technological improvements. The parameter estimates are used to simulate counterfactual policy scenarios in order to quantify the e ectiveness of the Danish feed-in-tari and replacement certificate programs. Results show that both of these policies significantly impacted the timing of shutdown and upgrade decisions made by turbine owners and accelerated the development of the wind industry in Denmark. We also find that when compared with the feed-in-tari ; a declining feed-in-tari ; and the replacement certificate program and the feed-in-tari combined, the replacement certificate program was the most cost-e ective policy both for increasing payo s to turbine owners and also for decreasing carbon emissions.