EconPapers    
Economics at your fingertips  
 

Green investment under policy uncertainty and Bayesian learning

Peder A.O. Dalby, Gisle R. Gillerhaugen, Verena Hagspiel, Leth-Olsen, Tord and Jacco J.J. Thijssen

Energy, 2018, vol. 161, issue C, 1262-1281

Abstract: Many countries have introduced support schemes to accelerate investments in renewable energy (RE). Experience shows that, over time, retraction or revision of support schemes become more likely. Investors in RE are greatly affected by the risk of such subsidy changes. This paper examines how investment behavior is affected by updating a subjective belief on the timing of a subsidy revision, incorporating Bayesian learning into a real options modeling approach. We analyze a scenario where a retroactive downward adjustment of fixed feed-in tariffs (FIT) is expected through a regime switching model. We find that investors are less likely to invest when the arrival rate of a policy change increases. Further, investors prefer a lower FIT with a long expected lifespan. We also consider an extension where, after retraction, electricity is sold in a free market. We find that if policy uncertainty is high, an increase in the FIT will be less effective at accelerating investment. However, if policy risk is low, FIT schemes can significantly accelerate investment, even in highly volatile markets.

Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0360544218314348
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:energy:v:161:y:2018:i:c:p:1262-1281

Access Statistics for this article

Energy is currently edited by Henrik Lund and Mark J. Kaiser

More articles in Energy from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2018-12-08
Handle: RePEc:eee:energy:v:161:y:2018:i:c:p:1262-1281