Stepwise Green Investment under Policy Uncertainty

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.

Feed-in Tariff Contract Schemes and Regulatory Uncertainty

“…Moreover, in this paper, we extend the framework to include policy uncertainty, whereby a downward jump in the tari↵ F may occur according to a Poisson process. Note that the Poisson process was also used in Boomsma & Linnerud (2015) and Chronopoulos, Hagspiel & Fleten (2016) to model policy uncertainty 4 .…”

“…If the FIT tari↵ is significantly higher than the market price, then the regulatory uncertainty accelerates investment behavior. With a semi-analytical real options framework, Chronopoulos, Hagspiel & Fleten (2016) also analyze the same optimization problem as our work. The model includes a fixed-premium FIT where investment may occur within a single stage or through multiple stages.…”

A Scoping Review of Barriers to Investment in Climate Change Solutions

“…Evidence of the importance of policy stability is already found through data linked to changing policy environments, including the production tax credit in the United States [51], public sector investment from the Australia Renewable Energy Agency [65], on-shore wind regulation across Europe [48,[66][67][68][69], and solar feed-in-tariffs [52,70]. The termination of policy, especially when retroactively done, is often singled out when discussing policy stability/uncertainty [71,72]. Ensuring policy is designed to be as efficient and effective as possible is key so as to avoid over-subsidising technologies which, in turn, leads to higher costs for government and, therefore, an increase in the likelihood of changes in policy [73].…”

When do households invest in solar photovoltaics? An application of prospect theory

“…Zhang et al (2016)), or how firms would ideally time and size investments under regulatory uncertainty (see e.g. Chronopoulos et al (2016)), a growing body of research shows that the residential sector behaves rather differently. For instance, the intention formation of home-owners to adopt PV does not solely depend on optimality principles and financial factors (see e.g.…”