Abstract

The aim of this article is to study how heterogeneous expectations concerning the low-carbon technological transition affect aggregate capital investment choices in the electricity sector. We develop a simple model where firms choose between two technological options by evaluating their future profitability prospects, within a finite planning horizon. Profit expectations are affected by beliefs about the speed of the technological transition and the associated stranding of existing high-carbon capital stocks. We assume firms’ transition expectations to be distributed around a central expectation scenario characterised by `rational stranding’, and heterogeneity of opinions to increase non linearly in psychological time. We then explore the space defined by our set of behavioural parameters, and study how central transition expectations, opinion diversity and planning horizons affect the allocation of physical investments between the two technologies.