The Value of Green Energy under Regulation Uncertainty
25 Pages Posted: 2 Jun 2020 Last revised: 9 Jun 2020
Date Written: May 4, 2020
We examine investments in power generation projects under policy uncertainty, when the investor has the choice between two alternative technologies, a gas-fired plant and a wind plant. Increased risk of subsidy withdrawal reduces the payoff from and postpones investments in the wind technology. Simultaneously, it accelerates investments in gas, thereby eliminating or further postponing investments in wind capacity. We show that this substitution phenomenon can be of first order importance: it can have a significant impact on the timing of investment, the wind premium, and the probability of investing in the wind technology. Our results provide new insights about the scope and impact of green energy regulation.
Keywords: green energy, wind plant, gas-fired plant, real options, subsidy, regulation uncertainty
JEL Classification: G13, Q40, Q42, L94.
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