A Real Options Analysis for Renewable Energy Investment Decisions under China Carbon Trading Market

Yanbin Li, Min Wu and Zhen Li
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Yanbin Li: School of Economics and Management, North China Electric Power University, Beijing 102202, China
Min Wu: School of Economics and Management, North China Electric Power University, Beijing 102202, China
Zhen Li: School of Economics and Management, North China Electric Power University, Beijing 102202, China

Energies, 2018, vol. 11, issue 7, 1-10

Abstract: Under the carbon trading mechanism, renewable energy projects can gain additional benefits through Chinese Certified Emission Reduction transactions. Due to the uncertainty of carbon trading system, carbon prices will fluctuate randomly, which will affect the investment timing of renewable energy projects. Thus, the value of the option will be generated. Therefore, renewable energy power generation project investment has the right of option. However, the traditional investment decision-making method can no longer meet the requirements of renewable energy investment in the current stage. In this paper, a real option model considering carbon price fluctuation is proposed as a tool for renewable energy investment. Considering optimal investment timing and carbon price, the model introduces a carbon price fluctuation as part of the optimization, studies the flexibility of enterprises’ delayed investment under the fluctuation of carbon price. A case study is carried out to verify the effectiveness of the proposed real option model by selecting a wind farm in North China. The model is expected to help investors to assess the volatility and risk of renewable energy projects more accurately, and help investors to make a complete plan for the project investment, thus promoting the efficient allocation of resources in the energy industry.

Keywords: carbon price fluctuation; renewable energy; real options analysis; investment under uncertainty (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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