Sammendrag
Current renewable energy support schemes may be terminated or revised in the future. We use a real options approach to assess how such expectations affect the threshold revenue required to invest. We model uncertainty in both electricity and subsidy prices (geometric Brownian motions), and the risk of a termination or revision of the current support scheme at some random future point in time (Poisson event). We show how to derive analytical solutions to this multivariate real options problem and illustrate these numerically for a realistic case study of a wind power project The optimization problem is nontrivial to solve and results in a threshold revenue which is a nonlinear function of the observed electricity price. The analytical solutions are illustrated numerically for a wind power project. We show that, in the benchmark case where we ignore policy risk, the threshold revenue may be higher but also lower under a quantity-driven scheme as compared with a price-driven scheme. Expectations that the current scheme will be terminated will slow down investments (raise threshold) if it is retroactively applied, but speed up investments (lower threshold) if it is not. If investors expect a revision of the current support scheme--in the trend and/or in the volatility--this may also change the incentives to invest today. We conclude the paper by discussing the social cost of policy uncertainty.
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