Throughout this report, the key metric of interest representing exposure to cost uncertainty is the standard deviation of the present value (PV) of long-run discounted expenditures to build and operate the portfolio of assets. [...] The timeline for the investorβs decision and the resolution of uncertainty is as follows: in period π‘π‘, the investor observes the current known values of CAPEX costs ππππ,π‘π‘, OPEX costs ππππ,π‘π‘, and the existing portfolio of legacy assets π΄π΄π‘π‘ , collectively referred to as the βstate.β Based on this state and the known probability distributions, the investor makes a decision to b. [...] The benefits of optionality (i.e., the reduction in the standard deviation going from a fossil-only or green-only strategy to the optimized one) are largest when there are larger differences in current costs of the two asset typesβfor example, when fossil fuel prices are high but the costs of green assets are low (bottom right panel of Figure 2), since the option of gaining access to the lower-cos. [...] For example, in the region where Resources for the Future 9 green CAPEX is at its lowest (bottom left of the surface in each panel), cost uncertainty increases with OPEX prices (i.e., along the bottom left axis) in the all-fossil portfolio (panel c) but not in the all-green portfolio (panel d). [...] For example, while the cost of replacing an electric vehicle at the end of its useful life remains, and spikes in the prices of critical minerals can affect those long-run expenditures, those risks occur in the future, whereas operational costs occur repeatedly throughout the life of the investment.
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