ABSTRACT
The model is based on the relationship between royalties associated with the production of a non-renewable energy resource and (1) the cost of the backstop energy source, (2) the interest rate and (3) the switching date to the backstop energy source. Although elegant and simple, a general weakness of the model is that, both to the market and to the analyst, a backstop technology may not be clearly identified. As a result, the cost and the switching date may be highly uncertain.
