Real Collars as Alternative Incentives for Subsidizing Energy Facilities

Roger Adkins and Dean Paxson

Manchester School, 2019, vol. 87, issue 3, 428-454

Abstract: We suggest that real collars may be acceptable incentives for encouraging development of low (or no) carbon energy generating facilities as an alternative for high feed‐in‐tariffs. We provide novel analytical solutions for real collars and partial collars, plus floor and ceiling partial derivatives. The ‘gains/losses’ of the energy generator as perceived parameter values change are compared to those of the government providing the collar, and floor or ceiling only, viewing the arrangement as a real option game between principal and agent. A volatility increase first increases, then decreases the ‘gains’ of the generator.

Date: 2019
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