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

Trine Krogh Boomsma, Nigel Meade and Stein-Erik Fleten

European Journal of Operational Research, 2012, vol. 220, issue 1, 225-237

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.

Keywords: OR in energy; Renewable energy; Support schemes; Investment under uncertainty; Real options (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (216)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:220:y:2012:i:1:p:225-237

DOI: 10.1016/j.ejor.2012.01.017

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