The Influence of Policy Regime Risks on Investments in Innovative Energy Technology
FCN Working Paper No. 2/2015
36 Pages Posted: 14 Oct 2015 Last revised: 16 Oct 2015
Date Written: October 2015
This paper dissects the ways in which policy regime risks influence decisions over innovative energy technology investments. We apply compound real options methodology to evaluate the investment in a virtual power plant platform and distributed energy resource (DER) assets in view of volatile electricity market prices and an uncertain future electricity market design. The analysis reveals two aspects of policy regime risks: a policy content effect relating to actual market dynamics resulting from a (new) policy regime, and a policy process effect relating to (uncertainty about) the speed and probability of a regime change. The paper underlines the importance of predictable policymaking to stimulate risky investment. It further details the need to account for technology-specific investment responses to different policy regimes and risks, caused by different degrees of market versus subsidy exposure and differences between platform versus non-platform technologies.
Keywords: Policy uncertainty, Virtual power plant, Distributed energy, Real option
JEL Classification: Q42, Q48, G11
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