Investment for renewable electricity under policy uncertainty

Specialeforsvar: Jing Miao

Titel: Investment for renewable electricity under policy uncertainty
A real option approach

Abstract: With the establishment of carbon neutrality goals, most countries have introduced support policies for renewable electricity investments. Direct subsidy payments through feed-in policies are the most widely applied, as their effects are direct and significant. However, since feed-in policies have a significant impact on promoting renewable electricity investments, governments face an increasingly burdensome subsidy payment. As a result, transitioning gradually from feed-in policies to other support schemes, such as the tradable green certificate scheme, is a feasible choice for governments. From the perspective of private renewable electricity investors, the uncertainty of exogenous policy changes has complex implications for their investment decisions. In this paper, we employ the real option method to examine the relationship between private
renewable electricity investors’ investment decisions and the subsidy, as well as electricity prices under the uncertainty of support schemes. Specifically, we consider the background where the government transitions from a dual-track scheme, providing both a gradually decreasing feed-in premium and tradable green certificates (where producers can choose only one
of them), to a support scheme that offers only tradable green certificates and we examine the impact on investment decisions of private renewable electricity investors. We particularly consider scenarios where the probability of this exogenous transition is related to the duration of the existing feed-in premium policy. We also explore the decisions of producers who have already invested under the dual-track scheme regarding their operation decision of receiving which kind of subsidy. Through model construction and case studies, we find that producers’ investment decisions are influenced by the investment costs, the expectation of subsidy income, and the price of electricity. Governments encounter significant resistance in promoting tradable
green certificates, as producers tend to rely on feed-in premiums unless the green certificate market proves to be sufficiently profitable. We not only investigate optimal investment and operational decisions from the perspective of renewable electricity producers but also provide insights for policymakers on how to make their policy transitions more effective. The structure of this paper is as follows: Chapter 1 provides background information, literature review, and an introduction to the fundamental knowledge of real options methodology. In Chapter 2, we discuss optimal investment decisions in the absence of external policy
changes. We examine optimal investment decisions under constant feed-in premiums in Section 2.1.1, decreasing feed-in premiums in Section 2.1.2, and a continuously available tradable i green certificate scheme in Section 2.1, respectively. The discussions in this chapter lay the foundation for the subsequent examination of the impacts of policy changes. In Chapter 3,
we explore investment decisions in the presence of uncertainty arising from the sudden cancellation of feed-in premiums while retaining tradable green certificates as the support scheme. We discuss investment decisions separately for scenarios involving the abrupt cancellation of fixed or decreasing feed-in premiums in Section 3.1 and Section 3.2, respectively. In Section
3.3, we employ the established model to calculate optimal investment decisions in a real-world case study and discuss the impact of variations in different parameters on these decisions. In Chapter 4, we discuss the decisions of producers who have already invested in the dual-track scheme regarding when to stop receiving feed-in premiums and shift to earning income through selling tradable green certificates. From the government’s perspective, this discussion helps understand how to encourage more producers to voluntarily enter the tradable green certificate market under the dual-track scheme. Furthermore, we examine the scenario in which the government’s probability of external policy transition gradually increases over time as policies are introduced. Finally, in Chapter 5, we provide the discussion and conclude for the thesis.

Vejleder: Trine Krogh Boomsma
Censor:    Niklas Kohl, CBS