Renewable energy investments under different support schemes: A real options approach

Trine Krogh Boomsma; Nigel Meade; Stein-Erik Fleten

doi:10.1016/j.ejor.2012.01.017

Renewable energy investments under different support schemes: A real options approach

Trine Krogh Boomsma, Nigel Meade, Stein-Erik Fleten

Department of Mathematical Sciences

189 Citations (Scopus)

Abstract

This paper adopts a real options approach to analyze investment timing and capacity choice for renewable energy projects under different support schemes. The main purpose is to examine investment behavior under the most extensively employed support schemes, namely, feed-in tariffs and renewable energy certificate trading. We consider both multiple sources of uncertainty under each support scheme and uncertainty with respect to any change of support scheme, and we obtain both analytical (when possible) and numerical solutions. In a Nordic case study based on wind power, we find that the feed-in tariff encourages earlier investment. Nevertheless, as investment has been undertaken, renewable energy certificate trading creates incentives for larger projects. In our baseline scenario and taking the fixed feed-in tariff as a base, the revenue required to trigger investments is 61% higher with renewable certificates. At the same time, investment capacity is 61% higher.

Original language	English
Journal	European Journal of Operational Research
Volume	220
Issue number	1
Pages (from-to)	225-237
ISSN	0377-2217
DOIs	https://doi.org/10.1016/j.ejor.2012.01.017
Publication status	Published - 1 Jul 2012

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Cite this

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abstract = "This paper adopts a real options approach to analyze investment timing and capacity choice for renewable energy projects under different support schemes. The main purpose is to examine investment behavior under the most extensively employed support schemes, namely, feed-in tariffs and renewable energy certificate trading. We consider both multiple sources of uncertainty under each support scheme and uncertainty with respect to any change of support scheme, and we obtain both analytical (when possible) and numerical solutions. In a Nordic case study based on wind power, we find that the feed-in tariff encourages earlier investment. Nevertheless, as investment has been undertaken, renewable energy certificate trading creates incentives for larger projects. In our baseline scenario and taking the fixed feed-in tariff as a base, the revenue required to trigger investments is 61% higher with renewable certificates. At the same time, investment capacity is 61% higher.",

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