Subsidies for Renewable Energy Facilities under Uncertainty

Research output: Contribution to journalArticle

Abstract

We derive the optimal investment timing and real option value for a facility with price and quantity uncertainty, where there might be a government subsidy proportional to production quantity. Where the subsidy is proportional to the multiplication of the price and quantity, dimensionality can be reduced. Alternatively, we provide quasi-analytical solutions for different quantity subsidy arrangements: permanent (policy is certain); retractable; suddenly permanent; and suddenly retractable. Whether policy uncertainty acts as a disincentive for early investment depends on the type of subsidy arrangement. The greatest incentive for early investment is an actual retractable subsidy, a ‘flighty bird in hand’.

Bibliographical metadata

Original languageEnglish
Article numberdoi 10.1111
Pages (from-to)222-259
JournalManchester School
Volume84
Issue number2
Early online date20 Feb 2015
DOIs
Publication statusPublished - 2016