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Stepwise Green Investment under Policy Uncertainty

Michail Chronopoulos, Verena Hagspiel, and Stein-Erik Fleten

Year: 2016
Volume: Volume 37
Number: Number 4
DOI: 10.5547/01956574.37.4.mchr
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Abstract:
We analyse how market price and policy uncertainty, in the form of random provision or retraction of a subsidy, interact to affect the optimal time of investment and the size of a renewable energy (RE) project that can be completed in either a single (lumpy investment) or multiple stages (stepwise investment). The subsidy takes the form of a fixed premium on top of the electricity price, and, therefore, investment is subject to electricity price uncertainty. We show that the risk of a permanent retraction (provision) of a subsidy increases (decreases) the incentive to invest, yet lowers (raises) the amount of installed capacity, and that this result is more pronounced as the size of the subsidy increases. Additionally, we show that increasing the number of policy interventions lowers the expected value of a subsidy and the size of the project. Furthermore, we illustrate that, although an increase in the size of a subsidy lowers the relative value of the stepwise investment strategy, the expected value of a lumpy investment strategy is still lower than that of stepwise investment. Keywords: Investment analysis, Capacity sizing, Renewable energy, Policy uncertainty



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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