The Effect of Environmental Policies on Risk Reductions in Energy Generation

Abstract

We demonstrate that environmental policies can decrease the risks in energy generation for private investors when several renewable technologies are simultaneously triggered. This is because diverse renewable technologies can hedge the intermittent generation of other forms of renewable power. Our study is distinct from previous literature, which has not examined environmental policies through a risk-reduction analysis, or has only considered a few technologies—such as wind and solar—when analyzing risk-reduction benefits. This paper is important, as environmental policies can be justified not only due to environmental benefits, but also economically from a risk-reduction perspective by using basic diversification gains.

Keywords: Environmental Policy; Risk Reduction; Energy Generation; Optimal Expansion Planning; Renewable Generation.

JEL Classification: Q28, Q42, Q48