City Research Online

Abstract

Although innovation and support schemes are among the main forces that drive investment in renewable energy (RE) technologies, both involve considerable uncertainty. We develop a real options framework to analyse the impact of technological, policy and electricity price uncertainty on the decision to invest sequentially in successively improved versions of a RE technology. Technological uncertainty is reflected in the random arrival of innovations, and policy uncertainty in the likely provision or retraction of a subsidy that takes the form of a fixed premium on top of the electricity price. We show that greater likelihood of subsidy retraction (provision) lowers (raises) the incentive to invest, and, by comparing a stepwise to a lumpy investment strategy, we show how an embedded option to adopt an improved technology version mitigates the impact of subsidy retraction on investment timing. Specifically, we show how stepwise investment facilitates earlier technology adoption compared to lumpy investment, and that, under stepwise investment, technological uncertainty accelerates technology adoption, thus further offsetting the incentive to delay investment in the light of subsidy retraction.

Publication Type:	Article
Additional Information:	© 2019 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/)
Publisher Keywords:	Investment analysis, Real options, Renewable energy, Policy uncertainty
Subjects:	H Social Sciences > HG Finance T Technology > TJ Mechanical engineering and machinery
Departments:	Bayes Business School > Actuarial Science & Insurance
SWORD Depositor:	Symplectic Administrator

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