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

See all articles by Ernesto Garnier

Ernesto Garnier

RWTH Aachen University

Reinhard Madlener

RWTH Aachen University

Date Written: October 2015

Abstract

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

Suggested Citation

Garnier, Ernesto and Madlener, Reinhard, The Influence of Policy Regime Risks on Investments in Innovative Energy Technology (October 2015). FCN Working Paper No. 2/2015. Available at SSRN: https://ssrn.com/abstract=2659177 or http://dx.doi.org/10.2139/ssrn.2659177

Ernesto Garnier (Contact Author)

RWTH Aachen University ( email )

Templergraben 55
52056 Aachen, 52056
Germany

Reinhard Madlener

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustra├če 10
Aachen, 52074
Germany
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)

HOME PAGE: http://www.eonerc.rwth-aachen.de/fcn

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