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The Influence of Policy Regime Risks on Investments in Innovative Energy Technology

Ernesto Garnier and Reinhard Madlener

Year: 2016
Volume: Volume 37
Number: Bollino-Madlener Special Issue
DOI: 10.5547/01956574.37.SI2.egar
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Abstract:
This paper dissects the ways in which policy regime risks influence decisions over innovative energy technology investments. We apply compound real options methodology to evaluate the investment in a virtual power plant platform and distributed energy resource (DER) assets in view of volatile electricity market prices and an uncertain future electricity market design. The analysis reveals two aspects of policy regime risks: a policy content effect relating to actual market dynamics resulting from a (new) policy regime, and a policy process effect relating to (uncertainty about) the speed and probability of a regime change. The paper underlines the importance of predictable policymaking to stimulate risky investment. It further details the need to account for technology-specific investment responses to different policy regimes and risks, caused by different degrees of market versus subsidy exposure and differences between platform versus non-platform technologies.





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