Green electricity investments: Environmental target and the optimal subsidy

Simona Bigerna (), Xingang Wen, Verena Hagspiel and Peter Kort

European Journal of Operational Research, 2019, vol. 279, issue 2, 635-644

Abstract: We investigate the optimal investment decision in renewables under market demand uncertainty, in the context of the Italian strategy for renewable deployment under the EU policy. The firm has to decide about the time and size of the investment. We find that a higher subsidy level induces the firm to invest earlier with a smaller investment capacity. This implies that a given environmental target cannot be reached by a too high (too low) subsidy level since this will cause the investment level to be too low (too late). We show that there exists an optimal (intermediate) subsidy level. Due to uncertain demand, in some cases ensuring to reach the environmental target in time requires an additional (conditional) subsidy. We propose a heuristic for policy makers stating when and how much subsidy to provide. Furthermore, we find that in a more uncertain economic environment the subsidy adjustment to maintain the target level of investment results in the firm investing earlier, which is opposite to the standard real options result.

Keywords: Investment analysis; Renewable energy sources; Public subsidies; Investment timing; Investment size (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221719304710
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:279:y:2019:i:2:p:635-644

DOI: 10.1016/j.ejor.2019.05.041

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().