Investment timing under uncertain renewable energy policy: An empirical study of small hydropower projects

Kristin Linnerud, Ane Marte Andersson and Stein-Erik Fleten

Energy, 2014, vol. 78, issue C, 154-164

Abstract: Policy uncertainty can be a powerful deterrent to immediate investments. Based on panel data of 214 licenses to construct small run-of-the-river hydropower plants, we examine whether the prospect of a common Swedish–Norwegian market for green certificates (i.e., a renewable portfolio standard scheme) affected the timing of investments. Our results show that traditional utilities and other professional investors in the energy market acted in accordance with a real options investment rule, and the prospect of possible future subsidies delayed their investment decision. On the other hand, our results do not show that farmers and other non-professional investors incorporated timing considerations in their investment decisions. Rather, our results indicate that these investors behaved as if their investment opportunity is now-or-never, investing if the project is profitable according to a net present value investment rule, ignoring the opportunity to create additional value by waiting. The observed difference in behavior between professional and non-professional investors is interesting given the distributed nature of many renewable energy technologies, and can help planners and policymakers better understand the forces shaping the future market for electricity.

Keywords: Policy uncertainty; Regulatory uncertainty; Renewable energy; Distributed generation; Investment; Real options (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:energy:v:78:y:2014:i:c:p:154-164

DOI: 10.1016/j.energy.2014.09.081

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