Green Electricity Investments: Environmental Target and the Optimal Subsidy

23 Pages Posted: 19 Mar 2018

See all articles by Simona Bigerna

Simona Bigerna

Department of Economics, University of Perugia

Xingang Wen

Bielefeld University - Department of Business Administration and Economics

Verena Hagspiel

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology

Peter M. Kort

Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER)

Date Written: March 18, 2018

Abstract

We investigate the optimal investment decision in renewables under market demand uncertainty, in the context of the Italian strategy for renewable deployment under the EU policy. Upon investing, the firm has to decide about the time and size of the investment. We find that a higher subsidy level induces the firm to invest earlier with a smaller investment capacity. This implies that a given environmental target cannot be reached by a too high (too low) subsidy level since this will cause the investment level to be low (too late). We show that there exists an optimal (intermediate) subsidy level to reach the environmental target. Furthermore we find that in a more uncertain economic environment the subsidy adjustment to maintain the target level of investment results in the firm investing earlier, which is opposite to the standard real options result.

Keywords: Investment Under Uncertainty, Renewable Energy Sources, Public Subsidies, Investment Timing, Investment Size

JEL Classification: D81, L51

Suggested Citation

Bigerna, Simona and Wen, Xingang and Hagspiel, Verena and Kort, Peter, Green Electricity Investments: Environmental Target and the Optimal Subsidy (March 18, 2018). Available at SSRN: https://ssrn.com/abstract=3143014 or http://dx.doi.org/10.2139/ssrn.3143014

Simona Bigerna (Contact Author)

Department of Economics, University of Perugia ( email )

Via A. Pascoli
Perugia, 06123
Italy

Xingang Wen

Bielefeld University - Department of Business Administration and Economics

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

Verena Hagspiel

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology ( email )

NO-7491 Trondheim
Norway

Peter Kort

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

HOME PAGE: http://center.uvt.nl/staff/kort/

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
69
Abstract Views
447
rank
410,454
PlumX Metrics